August 01, 2002
Dow 36000 Once Again

Dow 36000 Once Again

I see that James Glassman and Kevin Hassett are writing in the Wall Street Journal today, lying about what their Dow 36000 book says.

There are two different Dow 36000 books that they could have written. The first would say four things:

  • It looks like stocks held for a very long periods--30 years or more--are no riskier than bonds.
  • If you valued stocks on the same cash-flow principles as you valued bonds, the Dow would be valued at 36000.*
  • As long as you are planning on holding stocks for a very long time--more than 30 years--the overwhelming bulk of your returns from holding stocks come from the cash flows you receive, and the fact that stocks have not historically been valued on the same cash-flow principles as bonds will not greatly diminish your return.
  • Thus if you have a long time horizon--can afford to let your investments ride for more than 30 years--you should realize that buying-and-holding a diversified market portfolio of stocks will be superior to a bond-based portfolio as long as stocks are cheaper than the Dow would be at 36000.**

The second book would say:


Which b ook did they write? Look at the full title and subtitle: DOW 36,000 : The New Strategy for Profiting from the Coming Rise in the Stock Market. The point made in the subtitle is not that over the long run cash flows paid to stockholders give them a superior return over bonds no matter what happens to how stocks are valued. The point made is that stock prices are going to rise. Read their Atlantic Monthly article summarizing their book if you are skeptical.

Which book are they now pretending that they wrote? I leave that as an exercise to the reader.

*Actually, they should have called their book "Dow 22000": their basic calculations were in error--grossly in error. They could have examined either earnings yields on stocks, or dividend yields plus expected dividend and earnings growth. Instead, they examined earnings yields plus expected earnings growth, which double counts retained earnings.

**This first book was in fact written by the University of Pennsylvania's Jeremy Siegel. It is called Stocks for the Long Run.

Posted by DeLong at August 01, 2002 09:13 AM | Trackback

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In January 2000, at the height of the bull market there was widespread attention given "Dow 36,000. Discussion of the premise however was surprisingly uncritical and uncontentious. After an 18 year bull market that had brought market valuations to heights at least double their historical levels, analysts affirmed the market could continue to rise at historical rates. Simply asking how Abby Cohen and the rest could be as bullishish in January 2000 as in January 1995 or 1989 or 1982 should have been in order. To entertain Dow 36,000 without the toughest criticism shows how poor economic understanding was in the press.

Krugman has pointed out that even the authors own absurd numbers were wrong by 50%.

My sense was that Glassman in particular was hoping the book would undermine our traditional social security program.


Posted by: Anne on August 1, 2002 09:45 AM

I remember that article well. Made me cancel my subscription. (And now, if I sold all my stocks, I might be able to afford to renew it.)

Posted by: Andrew Northrup on August 1, 2002 09:55 AM

Quote from the WSJ article today:

Another way to say this is that investors have been bidding down the equity risk premium -- the extra return that they demanded in the past because they believed (irrationally) that stocks were riskier than Treasuries.

How do you talk to a 'scholar' who maintains that stocks are no riskier in the long term than Treasuries?

How do you even begin to debate Risk with those who completely blank out the variability of returns from their minds?

Like I said before: IDIOTS!

Posted by: Suresh krishnamoorthy on August 1, 2002 10:16 AM

Even if the stock market as a whole was no more riskier than treasuries over 15 to 25 years, individual companies are surely riskier, thus a premium should be built into equity prices.

The authors are not idiots, they are hucksters.

Posted by: on August 1, 2002 11:36 AM

Did the stock market decline contribute significantly to the recession? Will it contribute to further economic weakness?

Posted by: Anne on August 1, 2002 12:35 PM

I am amazed that the Washington Post hired Glassman to write a personal finance column. That like hiring Trofim Lysenko to write a science column.

Posted by: Paul Goldman on August 1, 2002 01:10 PM

Paul Goldman wrote: "I am amazed that the Washington Post hired Glassman to write a personal finance column. That like hiring Trofim Lysenko to write a science column."

Can I .sig that?

Posted by: Neel Krishnaswami on August 1, 2002 02:28 PM

Krug argued convincingly that the 36K number initially came from mistaking earnings for dividends; after the catchy title was locked in they threw in a bunch of other assumptions to cover their tracks:

Posted by: QED on August 1, 2002 03:44 PM

You're right...

Posted by: Brad DeLong on August 1, 2002 05:44 PM

A rather obvious point I haven't seen brought up, that's probably already handled somewhere else: a significant portion of investment in the stock market is not long-run, and that component of investment will be too averse to the short-run risk to justify P/Es on the order of a 22,000 Dow.

Maybe 16,000 instead?

Posted by: Jason McCullough on August 1, 2002 09:25 PM

I too am amazed that the general public accepts books like Glassman's and David Elias' (DOW 40000) that for the most part take a short period of time and just project indefinitely into the future. There is little discussion of cycles or behavioural finance. Being in the investment advisory business, I know that clients rarely have the patience to idly watch the gyrations of investment markets and let time and basic portfolio management practices smooth their returns. Glassman throws around thirty year periods of time without much attention to the human element of investing.

That being said, has there been any follow-up by the authors since this historic bear market has unfolded?

Posted by: Trow Trowbridge on May 24, 2003 06:29 AM
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