Dow 36000 Revisited

Wall St Journal ^ | 8-1-02 | JAMES K. GLASSMAN and KEVIN A. HASSETT

[SJackson]

When our book, "Dow 36,000," was published in September 1999, the Dow Jones Industrial Average stood at 10318. The Dow closed yesterday at 8736. What went wrong? Actually, nothing. Despite its flamboyant title, "Dow 36,000" was a book of sober explanation, not of wild prognostication. We calculated that 36000 was the point at which the 30 stocks that comprise the Dow Industrials would be fully valued, and we warned that "it is impossible to predict how long it will take."

[BullDog108]

" If Americans continue to embrace long-term stock investing, the role of the state as dispenser of retirement benefits will shrink or disappear."

Exactomundo bump!

[Dog Gone]

This is pretty lame, in my opinion. While I certainly agree with the overall theme that stocks will outperform bonds over the long run, the comment about timing the market is just silly.

If you're not worried about your investment for at least 10 years, that's one thing, but if you're already retired and watching your portfolio drop by 40% in a bear market, you're in deep doo-doo.

I cashed out of the market a couple of years ago, and while my returns during this period were meager, I at least had no losses whatsoever since then.

I'm selectively buying back in now in stocks that were especially hammered, and to say that has worked well would be a huge understatement. It is not folly to time the market as long as you have a rational basis for doing so.

Of course, guessing correctly helps, too! ;-)

[Eric in the Ozarks]

I should be unhappy with this because...

[BullDog108]

As for myself, its too late to get out. So I am looking for anything to justify staying in for the long term (10 - 15 yrs to retirement)..... :^(

[xrp]

If you're already retired (60s age and older) and still heavily invested in stocks then you're a pretty stupid investor.

Any clued investor knows that when you are unable to accept more risk (ie portfolio fluxes at old age) you move your assets to more stable investments.

[Dog Gone]

If you're already retired (60s age and older) and still heavily invested in stocks then you're a pretty stupid investor.

The conventional wisdom has been that the retired investor should still have a fairly large position in equities. An often quoted rule of thumb is that the percentage should be 100 minus your age.

But if you had 35% of your nest egg in stocks the last year, you've probably been severely hurt. A retired individual who pays attention to his investments (which, sadly, is a minority), could have shifted assets out of the inflated market and pocketed a fortune.

I'm not convinced that we've hit a bottom in this market yet. I wouldn't be buying an index fund, or even a mutual fund at this point. There are sectors, like the utilities (pipeline and power), that are extremely attractive at these prices. But the overall market can still slip much further.

Glassman would argue that further slippage is irrational and in the long term, the market will be much higher. He may well be right, and I think he is. But the retired investor can't think long term. He has to preserve his capital, and manage its growth in this kind of market today. That involves some timing.

[triplejake]

I think it is misleading for Glassman to compare a balanced portfolio of stocks (S&P 500) against a single, low-return bond category (treasuries) instead of a balanced bond portfolio -- other bond categories have much higher average rates of return (e.g., a study by the same group Glassman gets his figures from showed convertible bonds producing annual rates of return of 8.3%, intermediate corporate bonds 7.26% and the S&P 500 10.5%). Stocks still outperform, but not by nearly as much if a balanced bond portfolio is compared against the S&P.

The more macro problem I have with Glassman is that he assumes the period 1926-2001 will be a good benchmark for future performance. I guess it might be, but I am enough of a pessimist to think that the period where the US went from being one of several more-or-less equal powers to the undisputed economic megapower of the world probably yielded better performance than we will see in the 21st century, where other nations and their companies are likely to catch up some.

[IncPen]

I cashed out of the market a couple of years ago, and while my returns during this period were meager, I at least had no losses whatsoever since then.

You did have losses.

There's an old saying in economics, 'Opportunity cost is opportunity lost'.

I'd suggest you buy back into the market at a steady rate over a set period of time (called dollar cost averaging), getting into low-cost, stable funds, well diversified. Check out Vanguard funds.

You'll be glad you did.

[maestro]

LOL

Buy at 2500

:-)

[Stentor]

You'll be glad you did.

You may have to have your great-grandchildren read your statement to you but I guess you'll still be capable of experiencing gladness.

[IncPen]

You'll be glad you did.

You may have to have your great-grandchildren read your statement to you but I guess you'll still be capable of experiencing gladness.

You make a good point.

But with Social Security returning negative two percent overall, I'll take my chances.

[Dog Gone]

There's an old saying in economics, 'Opportunity cost is opportunity lost'.

That's like saying I lost money because I didn't place a bet on the winning horse in the Kentucky Derby.

The fact is that just about everyone who remained in the market doing dollar-cost averaging suffered REAL losses in their portfolios.

[IncPen]

That's like saying I lost money because I didn't place a bet on the winning horse in the Kentucky Derby.

I didn't make up the term, it's standard economics. Of course, economists are about as trustworthy as Trial Liars and weathermen.

But the gist of what you say is true: if you sit out, you might not lose, but you surely won't 'win' in the market.

If the stock market were measured in some objective way, for instance "The Immodium Factor", maybe we'd all feel better.

In any case, it beats Nazi Social Security every time.

[Dog Gone]

I agree with that, and I also think dollar cost averaging in a flat or bull market will make you quite wealthy. Certainly far more than Social Security ever could.

[Scribe35]

Glassman writes: "On Aug. 13, 1982, the Dow closed at 777. Even today, after the second-worst bear market of the
post-World War II era, it has risen 11-fold without counting dividends. "

There are several things to be noted here:

First, Glassman was careful to choose the most favorable time period he could find to show how the Dow has shot up. He does not mention that the Dow had closed a bit above 1,000 early in 1973 -- so on his baseline date of 8/13/82 it was a little more than 25 percent below where it had stood -- nine years earlier. The Dow didn't get back to its old 1973 high until 1983 or 1984. In fact, his baseline comes just before the market started climbing, after being stagnant for more than a decade.

Timing is important when you look at comparisons. In this case, the time involved from when 777 was FIRST reached to where the Dow is now is actually about 10 years more than he indicates, back to sometime in 1970. It's a 32-year stretch to today , not 20.

Also, he assumes that the Dow's level today is at or near the bottom. Who knows, really? If the 1973-74 bear market is repeated, certainly not a given but entirely possible, the Dow still has nearly 3,000 points down to go.

Glassman also neglects to talk about time periods as a real-life factor for individuals who don't live forever. . If someone had bought stocks in 1970, at about 770, the Dow would have gone up to 2000 in 1989. A rise of 160 percent isn't bad, but that would have been over 19 years, and the climb wouldn't have beaten inflation by much. An investment in a single family house would have done much better.

If a person bought in 1970 planning to retire, his portfolio (based on the Dow) would have been dead even in 1982, 12 years later. It would have doubled around 1987, after 17 years. As noted above, it would have been up 160 percent in '89, as momentum began building toward the once-a-generation bubble of the late 90s. Of course, a person around age 65 when it started would then be 84 years old.

This last frenzy was indeed a once-a-generation phenomenon. Market bubbles took place in the late 1920s, the early 1970s and the late 1990s. There might have been another one in the 1950s, but the boom after World War II was unusually solid because of pent-up demand from the war, low levels of debt through most of the boom, a technology revolution and millions of GIs learning new skills through the GI Bill. Notably, price earnings ratios stayed reasonable in that period and people still looked at the fundamentals of a company before buying its stock.

Of course, Glassman et al are right that the market will hit 36,000 -- and a cup of coffee will cost $50 at some point. There's an old story from Wall Street, about a guy who discovers cryogenics and has a wonderful idea. He puts everything he has into a portfolio of solid stocks, leaves it with a broker with instructions to sell and pay the proceeds to anyone who supplies a secret code number, and then has himself frozen. Decades later, he is thawed, wakes up, goes to the brokerage office and gives the secret number. They had him a cashier's check for $20 million. Excited, he goes around the corner to a bar and orders a Martini. When the check comes, it's for $10,000.

[Dog Gone]

Nice post.

[Tauzero]

"As for myself, its too late to get out."

Not so -- unless you firmly believe the bottom is in place.

[Tauzero]

Dollar cost averaging in a bear market only accelerates your losses.

[Tauzero]

Excellent post, number 16.

[razorback-bert]

Thanks very much, it is good.

[IncPen]

Dollar cost averaging in a bear market only accelerates your losses.

In the short view you're right. But your assumption is only valid in a permanent downward trend. The fact is the market goes up over time. Thus, the best time to buy with dollar cost averaging is as the market is trending down, because history says it will recover.

[Rodney King]

We calculated that 36000 was the point at which the 30 stocks that comprise the Dow Industrials would be fully valued, and we warned that "it is impossible to predict how long it will take."

What a bunch of jack-asses. They were wrong. Sure, someday the Dow will reach 36,000. In fact, I predict that someday the Dow will be 100,000.

[Rodney King]

author can wax poetic about long term, but when you invest in a company that goes bankrupt, there is no long term to consider

Right. If you buy 30 stocks and hold them for 30 years, some of them will go bankrupt. However, that does not happen for the S&P 500 because S&P boots stocks out of the S&P 500 when they are tanking. Therefore, using the S&P 500 as an indicator of long-term performance is wrong due to selection bias.

[SJackson]

Although I prefer the Dow to the S&P, they replace issues periodically as well. I didn't really take the article too seriously (or the book). About the same time John Templeton was asked how high the Dow would go, he stated definitively 100,000. To the followup question, when, in the next century.

[agenda_express]

"If Americans continue to embrace long-term stock investing, the role of the state as dispenser of retirement benefits will shrink or disappear."

Who cares. Retirement is for wimps. Until the 20th Century, only the lazy, super-rich retired. Who needs it - my grandparents and the rest of my ancestors didn't - neither do I.

[Tauzero]

"But your assumption is only valid in a permanent downward trend."

No permanence is required. Dollar cost averaging makes sense only when two necessary conditions are met: (1) one is not good at calling tops or bottoms (in individual stocks or indices,) or is not advised by such a person, and (2) the trend over your investment time horizon is up.

"history says it will recover"

I agree it will recover. But that is not the issue. Saying that it will recover is nothing more than a statement that the country will not vanish off the face of the earth. The issue is: will it recover over most people's investment horizon?

History actually gives us very few independent data points on which to base faith in the vaunted "long term." Ten to twenty, at most. Not enough on which to bet the farm.

Strangely, people's confidence in trends over various timescales is inversely proportional to the amount of available data.

[IncPen]

I can't really argue with what you're saying. I suppose that it comes down to the Immodium factor, and being an individual's choice what to do with their money (the portion not confiscated by Congress).

And I guess it's how you, as an individual, perceive things going.

You wrote:

(1) one is not good at calling tops or bottoms (in individual stocks or indices,) or is not advised by such a person

My grandfather, who I didn't have the opportunity to meet, was a margin officer for one of the major brokerages in Chicago in the 20s and 30s. In those days it was a position of some repute, because he was essentially deciding who the brokerage would lend money to, often using nothing more than a hunch.

My father told of his father sleeping in the office during the darkest days of the crash of 1929, and had a memorable anecdote about advice on stocks and why he never gave it.

It seems my grandfather was reasonably successful with his own investments, and was often asked for investment advice.

"I never will give it', my father quoted him as saying. "Because if I'm right they'll say, 'I told him what I wanted and he bought it for me', and if I'm wrong, it'll be 'that SOB lost all my money'"

My father didn't give investment advice either.

[Tauzero]

Excellent advice -- especially between friends.