The Dow Approach
The Dow Approach
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FOOL GLOBAL WIRE LEXINGTON, KY. (Feb. 13, 1997) -- Dow 7,000! It's human nature to celebrate milestones. We throw parties when we add another 365 days to our ages, or complete another year of marriage. Why? Is there anything inherently different between 10 years and 364 days and 10 years and 365 days? Of course not, but we love round numbers and we love to keep track of records. Ask any sports buff and you'll get quoted chapter and verse a variety of numerical milestones and facts. So, even though our party line is that an even number on the Dow doesn't mean anything, they're useful to celebrate and cheer where we've been. Let's look at some more relevant numbers, though. Ten years ago (December 31, 1986), the Dow closed at 1,896. At the end of 1996, we closed at 6,448. The annualized growth rate over the decade, then, has been 13.02%. That's only a point or so higher than the much longer-term average growth rate for the Dow. So even though it's amazing to watch us zoom through raw point level after raw point level, in percentage terms, the growth has not been that remarkable. In fact, even if the next ten years are markedly weaker than the past ten, only recording, say, nine percent a year instead of the eleven or twelve percent it's accustomed to, we're still looking at a Dow of more than 16,500 by the end of 2006. Don't let the raw numbers boondoggle you. In order for our economy to continue to grow, we must inevitably set new records along the way. That's normal. Does that mean we're over- or under-valued today? I couldn't tell you, and frankly, that doesn't concern me greatly. The more relevant question for me is, does anyone really believe the market (and the economy) will shrink over the next decade or two? Unless you're trying to time entry and exit points from the overall market, today's short-term valuation isn't a huge concern because you're not going to jump in and out of the market anyway. So, whether we see 6,000 again before we reach 8,000 isn't important. Anyone want to make a prediction? Let's look at where the Dow might be, not in 2000, but say, in 2030. Write it down; my prediction is that the Dow will hit 144,000! How's that for bold? (Do the math, though. It's only an 11% growth rate from 7,000 over 34 years.)
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