Editorial Reviews
From The Industry Standard
Dow 36,000 and The Crash of the Millennium arrive, and the critic, shivering in his attic, greets them with a sigh. Internet stocks are hovering in the stratosphere, all his friends are getting rich on IPOs, and he must wade through a pair of works with diametrically opposed theories about what the stock market will do. How can he even pretend to assess them?
Then again, who is the ideal reviewer of such disparate works? An economist? A professional stock-picker? A psychic?
Maybe a wrestling promoter. Ladies and gentlemen, in this corner we have the fearsome wonk tag team of James K. Glassman and Kevin A. Hassett, a couple of smooth-talking heavyweights who, one suspects, could make eating asphalt sound sensible. In the other corner, resplendent in his Merlin's cap and magic wand, is the flamboyant Cassandra of Crash, the economist Ravi Batra, whose latest meandering jeremiad says right on the cover, albeit in small print, that he is "author of the #1 best-seller The Great Depression of 1990."
In truth, the matchup is no contest, and not just because Glassman and Hassett have Batra outnumbered. The former have written a literate, cogently argued treatise in support of an outlandish conclusion, while the latter provides a surreal excursus across financial history that wraps with a utopian appeal for a wacky new financial system. Dow 36,000 is a good book, worth reading even if you don't buy the authors' entire argument. The Crash of the Millennium is nonsense, even if such a crash does occur.
The central message of Dow 36,000 is really very simple. The authors, like so many other Americans, have noticed that stocks tend to rise strongly over time, far outpacing inflation and any other investments. Not only that, but held by long-term investors (say, those with a time horizon of 10 years or more), stocks aren't even risky. Defining risk as volatility, the authors declare them to be no more dangerous in the long run than bonds. They profess that even if you bought stocks only at the worst possible times (as in 1929), you'd make out very nicely indeed.
The authors add that small-time investors – abetted by mutual funds, financial pundits and the Internet – are catching on to the stock market racket, which was once a playground largely for the rich. In their view, this discovery accounts for the greatest bull market in American history.
So far, so good. But Glassman, a former financial columnist for the Washington Post, and Hassett, an economist, go much further. They note that dividends paid by public companies tend to grow, beating inflation by perhaps 2 percent to 3 percent annually. Stocks pay historically low dividends now, but when you count anticipated dividend growth (and there's no reason not to, given more than 100 years of history), they look wildly underpriced compared with 30-year Treasuries.
Of course, many modern companies, especially technology firms, don't even pay dividends. (Heck, many Internet companies don't even have earnings.) The authors know this and focus instead on the money that a stock puts in your pocket, in whatever form. This includes money in the company's pocket, since you own that, too, as long as it isn't being consumed by the business merely to run in place. This approach is far more conservative than looking just at net income, which includes capital investments businesses make to stay even.
The numbers are impressive. The authors figure that, for the market as a whole, the free-cash "yield" in 1998 was 3.3 percent, vs. a 1.5 percent dividend yield. Better yet, this free-cash flow has been growing 10 percent per year since World War II.
Through compounding and some elegant arithmetic, Glassman and Hassett argue that their data point to one thing: a sharply higher stock market. They claim not to know when the Dow will hit 36,000 (which they regard as conservative), but suggest it might be around 2005. And they give plenty of investment advice. For good companies, they aver, price-earnings ratios below 100 are probably fine.
What the authors foresee is a historic, one-time run-up in equities resulting from recognition of a longstanding truth – that stocks have been undervalued for years. As precedent, they cite the acceptance of the idea, popularized by Michael Milken in the 1980s, that junk bonds were grossly underpriced in relation to the risks posed in a diversified portfolio of them. Since then, the premium paid to investors for accepting the risks of high-yield debt appears to be permanently lower.
As for Internet stocks, Glassman and Hassett sound a note of agnosticism. Sure, as they were writing, Amazon.com had a higher valuation than Sears, Roebuck and Co., and Priceline.com was worth more than Dow Jones and Sotheby's Holdings combined. But, say the authors, "we don't believe there is an Internet bubble in the sense that investors have puffed up prices out of all contact with reality. ... The Internet will definitely make many investors very rich; it already has. But picking winners and losers is difficult with companies that have little or no track record in profits." They suggest keeping Internet holdings to less than 15 percent of your portfolio, ignoring price and considering a mutual fund, "since there will be a few winners and lots of losers."
Glassman and Hassett write well, and their ideas make a lot of sense, even if their conclusion doesn't entirely. For one thing, their calculations are highly dependent on interest rates. After all, if bond yields rise sharply, returns on equities would have to do likewise to support a sky-high Dow. But stock prices would probably fall instead. Based on their assumptions, that fall would be precipitous indeed.
Also, investors might not have the fortitude to ride out what could be years of depressed stock prices. And long-term investors might not be able to overcome the effects of short-term traders, who might exercise more pricing influence.
Batra doesn't have any such worries. Judging by the evidence of his latest gloom-and-doom meal ticket, he plans to invest his royalties in gold, except of course for the cash he plans to stash in a safe-deposit box. Who can blame him? He's positive we're in for some kind of strange inflationary depression of unprecedented magnitude.
As with James Grant and other constant wolf-criers, sooner or later something even vaguely resembling what they predict is bound to occur (although it's hard to foresee a shattering depression accompanied by inflation). The question is, in whose lifetime? More important, how much profit do we have to forgo while waiting for the world to end?
- Daniel Akst writes frequently about money and investing. --This text refers to an out of print or unavailable edition of this title. |
