Most books that predict a sky-high stock market make their forecast either by extrapolating the trend line of the market's recent past or by looking at the demographics of the baby boom and the vast amounts of retirement funds chasing stocks. In Dow 36,000
, James Glassman and Kevin Hassett see a bright future for stocks, but rather than looking at external factors, the two base their prediction on the intrinsic value of equities and their ability to generate cash.
At the heart of Glassman and Hassett's argument is the idea that stocks have been undervalued for decades and that, for the next few years, investors can expect a dramatic one-time upward adjustment in stock prices. Why? While Wall Street has focused on valuation measures such as P/E ratios, it has virtually ignored how stocks can work as cash engines (the good ones, at least). The authors cite example after example of the growth in dividend income for stocks and how it has consistently beaten the annual payouts of long-term Treasury bonds. One example they cite is Exxon, which you could have bought in 1977 for about $6 when it was paying a dividend of 37 cents, or about 6 percent a share. Twenty years later, the dividend had grown to $1.63 or 27 percent of your initial $6 investment. Compare two $1,000 investments over 20 years in Exxon and 7.5 percent Treasury bonds: payments from the T-bonds would amount to $1,500; the Exxon dividends would add up to $3,585--not to mention that shares in Exxon went from $6 to $61 during that same period. To get to their target of 36,000, the authors project dividend growth of the 30 stocks that make up the Dow and apply a valuation measure that they call PRP ("perfectly reasonable price"). Many will dismiss this kind of thinking as wishful, but they're probably the same Chicken Littles who have been calling the market overpriced for years (think back to January 1993, when the Dow was hovering around 3,300).
In addition to making their case for undervalued stocks, the authors toss off some good investment advice about stock picking, portfolio allocation, and buying mutual funds, and they go to great pains not to bulldoze readers with investing and economic jargon. As you might expect, Glassman, an investing columnist for the Washington Post, and Hassett, a former senior economist with the Federal Reserve, are firmly in the buy-and-hold camp, and make the case for working with a full-service broker as a check against churning, something that's all too easy to do when trading over the Internet. This book is sure to rile some, but no matter where you think stock prices are headed, Dow 36,000 is a provocative read that belongs on the bookshelf of any thoughtful investor. Who knows? We may come to think of these guys as value investors on steroids. --Harry C. Edwards
From Publishers Weekly
The only thing missing from this half-time speech of an investment book is an exhortation to buy stocks for the Gipper. Despite the sensationalist title, Glassman, a syndicated columnist, and Hassett, a scholar at the American Enterprise Institute who used to be an economist at the Federal Reserve, argue only the classic case for investing in stocks: that over long periods of time stocks have always outperformed alternative investments. But no motivational device is spared to make this case more strongly than it has ever been made before. Experienced investors will wince at the simplification and overstatement as the authors, in their effort to obliterate the arguments of anyone who has ever suggested that stock prices might actually fall, brush aside considerations like risk, dividend yields and price-earnings ratios. These and all other objections are downed out by the drumbeat of Dow 36,000! How do they arrive at this number? In several different ways, none of which is described in detail. Over long periods of time the Dow goes up, with inflation if nothing else. In the last two decades, it has been rising at a rate that makes it triple every seven years. So predicting that the Dow will triple eventually is not saying much. The key question for investors is, will it triple fast enough to make stocks an attractive investment? Here the authors fall into confusion, suggesting, in the space of seven pages, that it could happen in three years or 10 years. This last prediction implies that the stock market will actually do worse in the next decade than it has in the previous two. Agent, Rafe Sagalyn. First serial to the Atlantic Monthly; BOMC alternate selection; Money Book Club main selection; 5-city author tour.
Copyright 1999 Reed Business Information, Inc.