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A Lighter Dow
POINT: Don't Get Caught Up in Media Hype
FOOL ON THE HILL: The Media's Wild Ride -- 08/08/97 Whenever the Nasdaq Composite, S&P 500, and Dow Jones Industrial Average all punch in losses of more than 1.0% in the day, what for more sober minds would be minor volatility was trumped into a stunning decline as the major business networks gunned for ratings. Normally, we can only imagine what the normally less financially sophisticated business sections of major newspapers will have to say the next morning in their efforts to sell papers. "Reeling," "Wall Street's Wild Ride," and "Frantic Friday" were all appellations applied to one Friday decline. What would have been only a $3/16 drop in a $10 stock was turned into a sign of pending disaster. Eager reporters waited outside of the offices of major discount brokerages in order to see if individual investors might panic and rush to sell their stock funds and pump them into money market funds. Sadly, now that the Dow is in the 8,000+ neighborhood, 100-plus point moves are much more frequent. As recently as 1994, a 100-point move would have easily been 2.5% or more. Now it is barely above 1.0% -- a percentage change that is certainly within normal historical limits. Each Dow stock only has to drop 7/8ths for the Dow to fall 100 points. Mass hysteria bordering on numerology is unfortunately not just limited to 100-point drops in the Dow or the arbitrary preference of a decimal system over the more investor-beneficial sixteenth system. The recent hubbub over Dow 8000, a mere 14.2% increase from Dow 7000, is a patent example of lunacy. Unless you are a perma-bear anticipating a 50% or greater market decline, here in the 8000 neighborhood the Dow should hit a millenium market number every year if it grows at the 10.6% average annual rate the S&P 500 has appreciated at since 1926. This means that the major financial networks and dailies need to gear up the 1,000 point mark "special feature" machines to constant readiness. Investors must always be careful not to dismiss the underlying economic framework and focus completely on "absolute valuation." This is the same sort of intellectual error that makes the media celebrate 1,000 point Dow marks. Individual investors who focus on the actual business being purchased and who ensure they (1) know a lot about the companies they buy and (2) buy at valuations that would be considered attractive by a prudent individual will continue to find the equities market the most efficient wealth creation machine available. Those who fail to heed either of those provisions will have more haphazard results and conceptualize the market as a giant Lotto machine, cheering minute percentage changes. All you have to do is decide where reason will take you.
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