Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition

Appendix I. Some Thoughts about the Current Stock Market as 2010 Begins

Today, it's hard to imagine the incredible ebullience in the stock market in 1999, when the first edition of Common Sense on Mutual Funds was published. Perhaps the best example was an op-ed essay in the Wall Street Journal by journalist James K. Glassman and the American Enterprise Institute's Kevin A. Hassett, which was later turned into a book entitled Dow 36,000, and published a few months after own my book, in late 1999. The Dow Jones Industrial Average was then at a level of 10,273. The Dow would go on to reach a high of 11,722 in January of 2000, only to tumble to 7,286 by October 2002, rising again to a new high of 14,164 in October 2007, before the bull market evaporated. The Dow would plummet to 6,547 by March 2009, recovering to 10,000 at this writing in the autumn of 2009.

The 36,000 level now seems like a pipe dream. But of course the Dow will one day get there. For example, if earnings of the 30 companies in the Industrial Average grow at the historic (nominal) rate of about 5 percent per year, and stock prices rise at the same rate (an assumption, not a prediction), the Dow would in fact reach 36,000 28 years hence, in 2037, nearly 40 years after the arrival time contemplated by Glassman and Hassett. (Indeed, in their article they suggested that the Dow, then trading at 25 times earnings, could safely support an immediate doubling in price to 50 times earnings.)

Of course I had no choice but to ...