This Will Take Just a Quick 22 Years

When prices are rising – for any asset – an investor should try not to be swept up in the euphoria of the moment. While that’s easy to say, it’s far harder to do.

Today the Dow reached the level of 36,000 and, for most investors, this is merely a trivial round number. But to long-term investors or students of the stock market, 36,000 is a very significant milestone.

To understand why, we take you back to 1999. Stock prices were in their fifth consecutive year of greater-than-normal gains. Such growth propelled stock prices in 1999 to a level of valuation that was unprecedented. (By “valuation,” we mean stock prices relative to underlying fundamentals such as earnings, assets, dividends, etc.) As the 1990s ended, stock prices were not just sky high, they resided in the largest bubble in American history.

Investors were partying in the stock market like it actually was 1999. And to punctuate the animal spirits that prevailed during that raging bull market, in October of that year financial journalist James Glassman and economist Kevin Hassett published a book titled “Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market.”

In the book, the authors argued that stock prices should very soon be priced at 36,000. The Dow averaged 10,000 throughout 1999 after already doubling during the previous five years. It was a historic run for stock prices causing something of a culture of lofty projections to be believed far and wide. We at Cheviot had endured enough of the type of advice suggested by Glassman and Hassett. Rising prices in any asset class, be they for real estate, stocks, commodities or other investments, can cause people to believe in fantastic assumptions. So, in January of 2000 we wrote a considerable amount on the subject. While the authors stated with the tone of a late-night infomercial that investors should “seize the opportunity now to profit from the rise of the Dow to 36,000,” we argued stocks were already priced way too high:

“Generally, current market prices can be validated only by the best of all worlds, in which interest rates continue to fall, profits rise faster than GDP, and peace and tranquility reign forever more.”

Simply put:

“There is no justification for 36,000 on the Dow.”

We positioned your portfolios accordingly – to weather and profit from the coming storm.

In the bear market that began just months after “Dow 36,000” and our rebuttal was published, the Dow fell to a low of roughly 7,300 in 2002, approximately 40% below its high reached in early 2000.

Yet in 1999 it was hardly just Glassman and Hassett who believed in pie-in-the-sky stock market projections. The vast majority of Wall Street was euphoric and countless financial advisors harmed countless more individuals by providing naïve advice that debilitated untold numbers of investors’ portfolios. When the bubble burst, a great many financial lives were ruined.

Glassman and Hassett were part of a chorus of voices in the bad advice and absolutely abysmal prediction universe. The day before “Dow 36,000” was published, a fellow named Charles Kadlec made it look like child’s play when his book, “Dow 100,000,” landed on shelves. Kadlec argued that stock prices would reach 100,000 in the year 2020. The Dow today is obviously not there yet but it certainly gives us something to talk about down the road when it reaches the six-figure milestone.

In the meantime, we continue to ignore lofty projections (and dour ones, too). High prices might instead be reason for caution just as low prices might provide intelligent buying opportunities. Some time-tested tenets of intelligent investing are worth repeating here: be rational, remain businesslike as an investor, and remember that slow and steady wins the race.


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