Mr. Dow 36,000 Has Good Advice for You
James Glassman’s book predicted a stock run for the ages—and when his prophecy didn’t come to pass, he and many of his readers lost big. Now he’s back with a follow-up: a conservative investment guide. MoneyShow.com editor-at-large Howard R. Gold catches up with Glassman to discuss the change of heart.
There are no second acts in American lives, F. Scott Fitzgerald once mused. No one was ever more wrong.
America is the land of reinvention. Exhibit A: Steve Jobs’ triumphant return to Apple (Nasdaq: AAPL) after being fired in the 1980s. Or consider Michael Vick’s spectacular football comeback following nearly two years in federal prison.
And if you think Charlie Sheen’s got a one-way ticket to oblivion, how about Robert Downey, Jr.’s impressive return to Hollywood stardom since completing rehab a few years ago?
The investing world has its share of second and third acts, too. The latest: James K. Glassman, the co-author (with Kevin Hassett) of the notorious Dow 36,000, is back with—of all things—an investment-advice book.
Sure, that may sound like the dictionary definition of “chutzpah.” This time, however, most of his advice is actually pretty good.
It doesn’t break new ground—Glassman has a lifetime’s quota of that—but it probably won’t lose you much money, either.
That’s the point. The book, Safety Net, aims to find a balance between equities’ growth potential and the so-called stability of bonds (I’ll have more to say about that later): a classic 50-50 split between stocks and bonds.
Two Years Late and 22,000 Short
It’s quite a change—call it a 180-degree reversal—from the super-bullish Dow 36,000, briefly a cultural milestone during the dot.com boom. The book was published October 1, 1999, almost six months before the Nasdaq Composite index peaked over 5,000.
Ah, those were the days! Individual investors ruled. Ads told us to “boot your broker.” The Internet revolution promised riches for everyone. And why not? Internet stocks routinely doubled or tripled on their first day of trading.
It was, we now know, one of the biggest stock manias ever, comparable to Japan in the 1980s and the US in the 1920s. In the 11 years since the bust, the Nasdaq has never reached 3,000, let alone 5,000.
And the Dow Jones Industrial Average? It stood at almost 10,300 when Dow 36,000 was published, eventually topped 14,000 in October 2007, and recently closed above 12,000.
That wasn’t what Glassman and Hassett expected, of course.
“Stocks are now in the midst of a one-time-only rise to much higher ground,” they wrote. “A sensible target rate for Dow 36,000 is early 2005, but it could be reached much earlier.”
They thereby broke the cardinal rule of Wall Street—if you name a target price, don’t pick a date—but the two were true believers. They, too, had drunk the Kool-Aid of a “new paradigm.”
“Could it be that investors are finally recognizing that stocks and bonds are equally risky and are—quite rationally—bidding up the prices of stocks to levels which make more sense?” they wrote.
Stocks, they argued, should be trading at 100 times earnings, not 25. Do the math, and you got to Dow 36,000.
So, after a nearly decade-long bull market that already had seen the Dow rise more than fourfold , Glassman and Hassett told investors that stocks were still cheap.
“All investors should have a substantial chunk of their money in stocks over the next ten years,” they wrote.
Next: Glassman Sobers Up|pagebreak|
Unfortunately, their argument was built on sand. The “equity risk premium”—the extra return investors expect to get for taking on the additional risk of stock—emerged like Jason from the lake in the Friday the 13th movies.
Traditional valuation measures such as price to earnings, price to book value, and so on, which the two had written off as so 20th century, also came back into style.
Result: The Dow actually fell 35% from its 2000 high to its 2002 low, and lost 54% from peak to trough from 2007 to 2009.
Glassman himself blamed several things for the failure of the Dow to reach his target—principally, the relative economic decline of the US and rising risk in the markets. (Brett Arends made short shrift of that in a recent MarketWatch column.)
The idea that stocks were no more risky than bonds was what really did him in.
In Dow 36,000, he and Hassett revealed they had 80% of their holdings in equities and 20% in bonds.
“Basically, it got hammered—like anybody who held an 80/20 portfolio,” he told me in an interview.
Glassman worked in the Bush administration starting in 2007, and he had to sell some stock—at the worst time—to supplement his government salary. Kind of like many retirees, no?
“My own experience has colored my views in writing the [new] book,” he said. “Also, it led to a greater appreciation on my part for what investors go through.”
Part of that was more respect for the role of investors’ psychology. Mathematical retirement models might tell people to put 60% or more of their portfolios in stock, but many real people can’t stick with the program when the market goes crazy, which he thinks will happen more often in coming years.
“What you really want is protection on the downside,” he said. “Yes, you give up something on the upside to protect yourself.”
Hence, his “margin of safety” portfolio, which comprises a 50/50 stock/bond split.
It’s hard for me to object—I advised the same mix a couple of years ago—although I think you should own more stock if you have the stomach for it, especially if you’re under 50.
Unfortunately, Glassman is urging people to buy more bonds now, after a $650-billion bond-fund-buying binge in 2009 and 2010, virtually identical with the amount investors poured into stock funds during the dot.com bubble! And most advisers are convinced interest rates will head higher.
So, once again he may be looking in the rear-view mirror. (His specific fixed-income recommendations are pretty good, however, avoiding bonds that are most exposed to interest-rate risk.)
Other pundits made outrageous predictions back then, too: Charles Kadlec, David Elias, and Harry S. Dent, Jr. all said the Dow would go even higher than 36,000. None of them got the ink Glassman did.
Also, Glassman at least has clearly admitted he was wrong, while stopping short of a full apology.
On that point, he defiantly stuck to his guns.
“Investors who followed the Dow 36,000 strategy emphatically did not LOSE money,” he wrote in a follow-up email—pointing out that, for anyone who invested 100% of their money in the Dow stocks (which he didn’t recommend in the book) at that time, “the return would have been a total of 19%, plus dividends.“
If they stuck it out through two bear markets, of course.
I can understand why many investors would choose to ignore Glassman: Dow 36,000 added jet fuel to what was already a raging inferno, and it all ended in tears.
But the 50-50 stock-bond portfolio is pretty good advice for most people most of the time.
So, to paraphrase another great writer, D.H. Lawrence: even if you don’t trust the teller, at least trust the tale.
Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. You can follow him on Twitter @howardrgold.