Dow 36,000: The New Strategy For Profiting From The Coming Rise In The Stock Market by James K. Glassman, Kevin A. Hassett

From the Publisher

Contrarian . . . controversial . . .
compelling . . . practical
This book will liberate investors from conventional wisdom and change the way everyone thinks about stocks and investing. What's the message investors have been getting from media pundits and so-called market experts? "Stocks are in the stratosphere. . . . They're risky. . . . We're headed for a fall."

Jim Glassman and Kevin Hassett heard this message for years but wondered why the opposite kept happening. Instead of declining, the prices of stocks kept rising. Was financial gravity being defied, or were other forces at work? Were investors being frightened away from profits they could be enjoying from a market that will continue to boom?

Dow 36,000 is the result of Glassman and Hassett's investigation. It is one of the most important and provocative books on markets and investing written in recent years. Its original and compelling analysis and practical program for profiting from the continuing rise in the stock market are ideas that every investor—from neophytes to the most experienced—must understand and act on now.

• Stocks are undervalued, not overvalued. Stock prices will double, even quadruple, within a short period of time. The Dow Jones Industrial Average will soon reach 36,000. Astounding profits can be made, but the time to act is now! Dow 36,000 tells why this one-time rise is coming and how to adjust your portfolio and invest without fear.

• The perfectly reasonable price. Prices are too low because investors and Wall Street have been looking at stocks the wrong way: at valuation levels of the past (the traditional ceiling of the price/earnings ratio, for example). Dow 36,000 provides a new model—a new way of valuing the worth of any stock by figuring out how much money it will put in an investor's pocket.

• How to invest with confidence. Glassman and Hassett provide investors with a sensible strategy for making money by becoming a disciplined "36er." Their practical advice tells why many investors should not be active traders and why it's important to hold on to stocks and mutual funds even when they go into a downturn.

• A practical program to maximize your portfolio. Glassman and Hassett provide their picks for the best stocks and mutual funds, but just as valuable are their ideas on how to think about the kinds of stocks and mutual funds that will help earn the most money. Examples include not only such stocks as Cisco Systems, Microsoft, and GE, but many you may not have thought of, including Tootsie Roll and Biogen.

Investors have long needed a new way to understand what is happening in the stock market. Dow 36,000 provides that understanding. It is the new paradigm.

About the Authors:
James K. Glassman, for many years a columnist for The Washington Post and host of the PBS show Techno-Politics, is currently financial columnist for the Reader's Digest and a fellow at the American Enterprise Institute. Earlier in his career he was the publisher of The New Republic and president of The Atlantic Monthly.

Kevin A. Hassett is a resident scholar at the American Enterprise Institute who formerly served as a senior economist at the Federal Reserve Board. He received his Ph.D. in economics from the University of Pennsylvania. He is the co-author, with R. Glenn Hubbard, of The Magic Mountain: Defining and Using a Budget Surplus.

Industry Standard

Battle of the Shock Stock-Pickers

Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market by James K. Glassman and Kevin A. Hassett (Times Books, $25)

The Crash of the Millennium: Surviving the Coming Inflationary Depression by Ravi Batra (Harmony Books, $24)

Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market and The Crash of the Millennium: Surviving the Coming Inflationary Depression 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: The New Strategy for Profiting From the Coming Rise in the Stock Market 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.... 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.

Publishers Weekly

The only thing missing from this half-time speech of an investment book is an exhortation to buy stocks for the Gipper. Despite the sensationalist title, Glassman, a syndicated columnist, and Hassett, a scholar at the American Enterprise Institute who used to be an economist at the Federal Reserve, argue only the classic case for investing in stocks: that over long periods of time stocks have always outperformed alternative investments. But no motivational device is spared to make this case more strongly than it has ever been made before. Experienced investors will wince at the simplification and overstatement as the authors, in their effort to obliterate the arguments of anyone who has ever suggested that stock prices might actually fall, brush aside considerations like risk, dividend yields and price-earnings ratios. These and all other objections are downed out by the drumbeat of Dow 36,000! How do they arrive at this number? In several different ways, none of which is described in detail. Over long periods of time the Dow goes up, with inflation if nothing else. In the last two decades, it has been rising at a rate that makes it triple every seven years. So predicting that the Dow will triple eventually is not saying much. The key question for investors is, will it triple fast enough to make stocks an attractive investment? Here the authors fall into confusion, suggesting, in the space of seven pages, that it could happen in three years or 10 years. This last prediction implies that the stock market will actually do worse in the next decade than it has in the previous two. Agent, Rafe Sagalyn. First serial to the Atlantic Monthly; BOMC alternate selection; Money Book Club main selection; 5-city author tour. (Sept.) Copyright 1999 Cahners Business Information.

John C. Bogle, senior chairman, The Vanguard Group - John C. Bogle

DOW 36,000 offers superb advice. With an eminently readable style, the authors present sound and simple wisdom about investment principles, mutual fund selection, index funds, and asset allocation. I am impressed!

David Malpass, chief international strategist, Bear Stearns - David Malpass

Glassman and Hassett's ideas are timely and thought-provoking. Either we are in a bubble with inefficient financial markets, or else past theories on stock prices and price-earnings multiples have to be revised. In every one of my meetings with mutual funds these days, I have to address the issue of whether stocks are overhauled. Glassman and Hassett's theories make the solid case that, on average, they are not.

What People Are Saying

Allan H. Meltzer
Every stock owner should read this book.
—(Allan H. Meltzer, professor of political economy, Carnegie Mellon University)

John C. Bogle
While there will be bumps—maybe big ones—along the way and the road may be surprisingly long, Dow 36,000 offers superb advice. With an eminently readable style, the authors present sound and simple wisdom about investment principles, mutual fund selection, index funds, and asset allocation. I am impressed!
—(John C. Bogle, senior chairman, The Vanguard Group)

David Malpass
Glassman and Hassett's ideas are timely and thought-provoking. Either we are in a bubble with inefficient financial markets, or else past theories on stock prices and price-earnings multiples have to be revised. In every one of my meetings with mutual funds these days, I have to address the issue of whether stocks are overvalued. Glassman and Hassett's theories make the solid case that, on average, they are not.
—(David Malpass, chief international strategist, Bear Stearns )

Product Details

• Table of Contents

Table of Contents