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Sky's The Limit

In Dow 36,000, James Glassman and Kevin Hassett argue that stocks today are seriously undervalued -- a notion that's at odds with just about every other valuation measure. Glassman has been financial columnist for The Washington Post, publisher of The New Republic, and president of The Atlantic Monthly. Hassett is a resident scholar at the American Enterprise Institute and has served as a senior economist at the Federal Reserve Board.'s Business & Investing editor, Harry C. Edwards, recently spoke with Glassman and Hassett about their book and the unique opportunities that stocks offer investors today. Other books are promising lofty heights for the Dow (e.g., Dow 40,000, Dow 100,000). What makes your prediction of Dow 36,000 unique?

James Glassman: What makes it unique is our theory of how to value stocks, which is at odds with the basic way that most people value stocks these days. We say that the Dow should be, based on our theory, at 36,000 right now, this afternoon. We don't think it's going to happen today, but it will happen in three to five years.

Kevin Hassett: All the experts have been saying stocks are overvalued, and then year after year, the market goes up. We begin the book by explaining why the market has gone up so much. And that explanation leads us to this remarkable prediction about what's going to happen in the future, because we think that our theory describes this kind of evolutionary process in the market that's not complete yet. Your theory is based on the idea that companies generate cash, lots of cash. Right?

Hassett: That's part of it. The important point that we make is that a stock can be valued like any other asset by the cash that it generates. And the present value of that depends in part on how risky stocks are. There's been this tremendous amount of evidence gathered in recent years by financial scholars that shows that stocks aren't nearly as risky as people thought. It's true that counting up the cash is at the core of our theory, but understanding how to value that cash, which depends on risk, is also very important.

We think that people have been learning gradually that stocks aren't nearly as risky as once believed, and as that process has gone on, more and more people have rushed into the market to take advantage of the great deal that stocks offer. And that increase in demand has driven up prices. In the book, you use the example of Exxon and its dividend growth rate. Even if Exxon's stock price doesn't rise, thanks to its dividend growth, Exxon is a safer, much more profitable investment than Treasury bonds.

Hassett: That's right, because you're just looking at the money that goes into your pocket over time in order to value that stock.

Glassman: The difference between a stock and a bond is that over time, a stock increases its profit and therefore increases the amount of money that flows to the people who own it. A bond doesn't do that. Stocks are too good a deal based on the amount of risk that's really involved. And more and more people are recognizing that.

Hassett: That's right. It's cash and it's risk. And understanding both of those is the key to understanding what stocks ought to be worth. You write that this rise in stock prices is a one-time event.

Glassman: Absolutely. We believe that stocks are headed, at least at current levels of profit, to 36,000 on the Dow. And when the Dow gets to 36,000, growth will level off. Significantly.

Here's another way to think about this. I've been writing my column for the Washington Post for six years and I hear this question all the time: "Is it too late to get into the stock market?" What we try to do in the book is give people a comfort level. We think this is an excellent time to get into the stock market, which is completely at odds with what you hear from the Wall Street and academic establishments. So what's the best way to go along for the ride? Index funds?

Glassman: Well, in the book, we give people a lot of alternatives. I think that if someone does not want to spend the time studying individual stocks, then index funds are an excellent way to participate in the stock market. We believe in diversification. We don't think you should put all your eggs in one basket. We think the market as a whole is going up. And so index funds make a lot of sense, as well as index vehicles such as things called "spiders," which are kind of like stocks that trade on the exchanges. Contrary to the trendiness of online brokers, you still recommend using traditional brokers. Why?

Hassett: We think that the evidence is absolutely conclusive that people tend to sell stocks when they're left to their own devices, at just the wrong time. People need help. So the market drops a few hundred points, and someone will say, "Oh, my god, I'm losing money. I've got to get out now. What if I lose more?" But often that's exactly the worst time to sell. You're selling when the price is low. A good professional broker is going to hold your hand in those tough times and help you stay in the market and ride the rough seas and get the profits that the market is going to deliver.

Glassman: We definitely think people need advice, but we don't just say, "Rush out and grab whatever broker you can find, or whomever calls you up." And we list in the book questions that you should ask in order to find a good broker. It is a very rare investor who does not need help of some kind.

Featured Titles

DOW 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market by James K. Glassman, Kevin A. Hassett
Dow 40,000 : Strategies for Profiting from the Greatest Bull Market in History by David Elias(Introduction), Charles V. Moore

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