Saturday, May 11, 2013

Dow at 15,000 Now ... How's 100,000 Sound, Young Folks?

The Dow average first crossed the 1,000 mark near the end of the 1960s. Today it sits at 15,000. That's happened over slightly more than four decades.

Let's look ahead and see what that says about where we go from here. Because as Mark Twain said, history may not repeat itself, but it rhymes. First, the math.

15 X 15,000 = 225,000. So why does a prediction of Dow over 100,000 by 2040 or 2050 not make sense? It does to me.

And even though I won't be around to see it come true, today's younger folks will be. So let's look at the lessons of the stock market and what they have to teach us about the long term opportunities in stocks.

Dow 15,000? Try 116,200 is subtitled 'Why it's not as far-fetched as it sounds.'

The forecast puts forth a conservative but realistic price level for the stock market in another several decades. It's the effect of history and the compound interest rules of 72 (doubling) and 115 (tripling) and the benefits of saving and investing over a long period of time.

{NOTE: Using myself as an example, I began my working, saving and investing career in the late 1960s at about the time the market hit its then record high of 1,000. Young folks should take this lesson to heart. To be successful investors, we don't have to hire "professional" advisers; just be "in the game," persistent and long term oriented.}

In any event, the aforementioned "Dow 15,000? Try 116,200" forecast says this about the future:

"(116,200) was the market level predicted by mutual fund pioneer Bill Berger in a 1995 speech at a Society of American Business Editors and Writers conference in Boston, and it was almost as laughable then — with the Dow at 4,500 — as it seems now, when it stands more than 100,000 points into the Dow’s future.

Berger . . . said the market would reach his magic number in 2040. . . .

Yet with the Dow at 15,000, it doesn’t really look like Berger will be off by much, as far-fetched as it seems.

I look back on Berger’s prediction periodically because he could not have foreseen the events that have happened since. In fact, that was a huge part of the point he was making at the time, about the difficulty of forecasting.

In 1995, the market was about to catch fire, and Berger didn’t live long enough to see the Internet bubble burst. He was not predicting the horrendous 2000s and, in fact, his point in looking out so far was that he didn’t feel that interim events — even catastrophic ones like the financial crisis of 2008 — would make much of a difference on what the market would do in the very long term.

It’s a lesson worth revisiting at a time when many investors are worried that the market cannot maintain its current highs, let alone proceed on any pace that would make 116,200 ever be a reality.

The basis for Berger’s forecast was simple. By 1995, he’d been in the investment business for 45 years, and had seen the Dow go from below 200 to just over 4,300. Mathematically, Berger saw the Dow’s future as reflecting what had happened in the past, thus moving it from 1995 levels to 116,200 in 45 years.

Using easy, round numbers, the Dow needed roughly 16.5 years to triple from the time of Berger’s prediction, crossing 13,000 early in 2012.

Using the Rule of 115 — a rough measure of how long it takes for something to triple based on a constant return — that’s a gain of roughly 7% per year.

If that rate of return holds for the future — and it’s smack in the middle of the 6% to 8% long-term range that many market observers believe is realistic — then the Dow would triple twice more over the next 32 years.

If that happens, the Dow will cross 116,200 sometime in 2045, a bit after Berger’s time frame but not wildly off base, especially when considering that the forecast would have made investors break out in hysterics had it been made, say, any time after 2000.

Plenty of market watchers will tell you that we are living in changing times, that the 45 years covered by Berger’s forecast are radically different than the ones included in his investing career.

That actually would play to his point, which essentially is “markets go up over time; hold them long enough and you’ll be rewarded more than by following any forecast of what is likely to happen next.”

Investors want to attach significance to market milestones, but a new level for the stock market is more like crossing a state-line than breaking the sound barrier. It signals that a new territory is being entered; it doesn’t change the game.

Meaningful or not, investors typically react to landmarks by:

  • A) Seeing it as a warning that the market is getting too high, so that they back off or go into wait-and-see mode to determine if the market is resisting the new highs.
  • B) Viewing it as a sign of things to come, so they jump on board to make sure they don’t miss out on the index’s next benchmark.
  • C) Treating it like any other number, having no more impact on what happens next than yesterday’s box scores have on games scheduled for tomorrow.

While short-term moves can pay off, the real question is whether they jeopardize long-term strategy. It’s more important to capture the market’s performance over a lifetime, rather than a week, month or year.

There have been times since Berger’s forecast — such as the Internet bubble days as the Dow barreled towards 10,000 — when his prediction seemed way too low, and other times — like the two bear markets in the 2000s — when it looked way too lofty. . . .

What Berger said in 1995 holds true today: “There’s not an investor who has been alive for the last 60 years or more who hasn’t seen the market rise over their lifetimes.” That period included a chunk of the Great Depression.

“So I don’t know exactly where the market is going over the next five or six decades,” Berger said, “but I know it will be up.”

That’s about as much as any investor should read into a market milestone. Berger noted that market milestones tend to bring out the forecasters and prognosticators, and he cited what he called “the two rules of forecasting.”

  • Rule 1: For each forecast, there is an equal and opposite forecast.
  • Rule 2: Both of them are wrong.

Keep that in mind as you consider Dow 15,000 and you hear the market-watchers and soothsayers tell you what they feel is about to happen. If you must find peace of mind in a forecast, find one that takes a long view over a significant, meaningful time period.

There’s a decent chance the Dow hits 116,200 before 2050; it may even do it on Berger’s time frame of 2040. About the only thing investors should count on, however, is that the journey from here to there will be long, bumpy and difficult to make."

Summing Up

The long run is what investing is all about.

That and minimizing the ongoing costs during that long run --- the less we pay the "pros," the more we are able to invest for the future long term benefit of ourselves and our families.

Investing early means a great deal to long term success, as does investing in a basket of diversified individual blue chip stocks or an S&P 500 index fund with passive management and minimal fees.

It's really that simple and it's that easy, too.

So the youngsters among us should saddle up, enjoy the ride, expect the bumps and then stay the course for what in the end will seem like a short and quick trip to a comfortable retirement.

That's my take.

Thanks. Bob. 

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