www.theatlantic.com/issues/99sep/9909dow.htm
"The Market as God," by Harvey Cox (March, 1999) The Supreme Being of religious worship has sometimes been defined as omnipotent, omniscient, and omnipresent. The business pages embrace an uncannily similar theology.
", by Clifford Cobb, Ted Halstead, and Jonathan Rowe (October, 1995) Why we need new measures of progress, why we do not have them, and how they would change the social and political landscape.
"The Stock Market" (Slate, April 28, 1999) A written exchange between James KGlassman and The Economist's Clive Crook in which Crook takes issue with Glassman's extreme optimism about the stock market.
Don't Hold Your Breath," by Russell Wayne (March 26, 1999) "The investment markets tend to breed increasingly creative thinking during periods of extreme prosperity, such as we are now enjoying." An article published in TechWeb, a news service focusing on information technology. Stocks were undervalued in the 1980s and early 1990s, and they are undervalued now. Stock prices could double, triple, or even quadruple tomorrow and still not be too high. Market analysts and media pundits have also persistently warned that stocks are extremely risky. Over the long term stocks in the aggregate are actually less risky than Treasury bonds or even bank certificates of deposit. Although the experts may not be very good at predicting what the market will do, they are brilliant at scaring people -- not out of malice but out of a profound misunderstanding of stock prices. Whatever their intentions, they have performed a terrible disservice to millions of investors by frightening them away from the market.
After they complete this historic ascent, owning them will still be profitable but the returns will decline. You won't be able to make as much money from them each year. We believe that in the meantime, however, astounding profits will be made. They have ignored the dire warnings from professionals that have accompanied nearly every step of the Dow's rise from 777 on August 12, 1982. They are rejecting the outdated model that Wall Street has used to assess whether stocks are overvalued -- a model based largely on historical price-to-earnings, or P/E, ratios. That rejection reflects not their nuttiness but their sanity.
Federal Reserve Board -- made on December 5, 1996, with the Dow at 6,437 -- many investors are rationally exuberant. They have bid up the prices of stocks because stocks are a great deal. Still, even the most enthusiastic investors have doubts. They know vaguely that stocks are wonderful, but they have no real framework of analysis. We began by wondering what on earth was going on in the market. Stocks had quintupled in price in the dozen years up to 1994. Then, in 1995, 1996, and 1997, the Standard & Poor's 500 composite index, generally considered a good proxy for US stocks as a whole, scored returns of more than 20 percent. We weren't satisfied with the explanations we heard in the press and on Wall Street: that investors -- reflecting what Charles Mackay called "Extraordinary Popular Delusions and the Madness of Crowds" (in the title of the second edition of his 1841 book) -- were acting irrationally, or that Baby Boomers all of a sudden remembered they should invest for retirement and decided to dump huge sums into stocks as protection against a penurious future. If the issue was whether the market was overvalued, we wanted to know this: What is the right value -- that is, price -- for a stock? They typically focused on the P/E ratio and other "valuation indicators." Wall Street analysts figure that if P/Es are too high, stocks are overpriced. But the term "too high" relates only to history, not to substance. How many dollars does a stock put in your pocket over time? As John Burr Williams, a brilliant economist with the ability to cut through the muck, wrote in 1938, "A stock is worth only what you can get out of it." So we developed a method for estimating the flow of cash from a stock, and then we determined what that cash flow is worth. A house that throws off $1,000 a month in rental income might be worth, say, $200,000. A restaurant that generates $100,000 a year in profits might be worth $1 million. What is the "perfectly reasonable price" -- or, as we put it, the PRP -- for any share of stock? In our research we were surprised at how high PRPs turned out to be. But after refining our analysis for a year, and listening to the criticisms and suggestions of people we trust, we are convinced that our theory is correct, and that it explains -- as no other theory does -- the rise in stock prices over the past two decades. More important, we concluded that the rise will continue, at least until Dow 36,000. The History of Stocks: A New Interpretation T HE stock market is a money machine: put dollars in at one end, get those dollars and more back at the other end. The history of these remarkable returns is vivid and undeniable, yet few investors seem to be able to make it out in the fog of hourly jabber and the haze of constant fear, and many experts seem always to draw from the past the lesson that stocks are headed for a fall. Here, instead, are the lessons that we draw from history. Lesson 1: Stocks have been steady winners through thick and thin. Imagine that you bought $10,000 worth of stock on the very eve of the Great Crash, at the beginning of October, 1929. Over the next two months, if you held a portfolio similar to the modern S&P 500, you would have lost $3,000. It would get worse: after big losses in 1930, 1931, and 1932, your $10,000 stake would have been reduced to $2,800. Naturally, you would have been tempted to sell as trouble brewed in Europe. But if you had decided to hang on, you would have been rewarded: from 1933 through 1936 stocks enjoyed their best four-year period in history, tripling in value. Remember that these were some of the darkest times on the planet, with fascism infecting Europe and Asia, Stalin ruling Russia, bread lines everywhere, and Franklin Delano Roosevelt forced to remind Americans that "the only thing we have to fear is fear itself." As the decade wore on, Hitler marched into Czechoslovakia and Poland, and Japan invaded China. By the end of 1939 your account would have been up to $7,200. And because the 1930s were characterized by deflation, or falling prices, the buying power of that $7,200 would actually be $8,600. As the 1940s began, the war broadened, and the United States was soon fighting both Japan and Germany. The market fell and rebounded, and by the end of 1944, fifteen years and three months after you invested your $10,000, you would have been ahead -- by $400. Despite the worst-timed investment imaginable, the worst depression of the century, and the worst war in history, your initial investment would have grown by four percent. Over the next sixteen years, through the hot war in Korea and the Cold War elsewhere, through nuclear threats and labor turmoil, the market continued to rise powerfully. By the time of John F Kennedy's election as President, in 1960, your $10,000 would have become $92,900. Protests disrupted US campuses, and riots burned Detroit, Washington, Los Angeles, and other cities. Then came the Arab oil embargo, wage and price controls, the closing of the gold window, and the Watergate crisis. The years 1961 to 1975 were nasty and often depressing, and included the worst two back-to-back years (by far) for the market since 1930 and 1931; nevertheless, stock values more than doubled, and by 1975 your $10,000 would have been worth $261,800. Inflation accelerated to nine percent in 1978 and to 13 percent in 1979. The rate on long-term Treasury bonds took off as well, breaking 15 percent in 1981. Who would want to own equities when Treasury bonds were paying significantly more than stocks had returned historically? Yet the market continued to climb, and by 1985 your $10,000 stake would have become $999,000. Over the next thirteen years inflation declined, taxes were cut, the Berlin Wall fell, and US businesses rejuvenated themselves. The stock market soared, and by the end of last year your investment would have been worth $8,414,000. It would have grown by a ...
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