Taking Stock of Stocks


Over the course of half a century, the American investor has fallen deeply in love with stocks. Stocks occupy the heart of most investment portfolios and are at the heart of what has made so many Americans so much money over so many decades, especially in the 1980s and 1990s. And what’s not to love? The stock market, as measured by the Dow Jones Industrial Average from 1980 to 2000, rose an astounding 1,000 percent. Not 100 percent, but 1,000 percent. That’s pretty darn good. It’s especially good when you consider that the economy, as measured by gross domestic product (GDP), grew only 260 percent during that same time period. That’s a whole lot less than 1,000 percent.

By contrast, in the prior period from 1928 to 1982, a time of huge growth of the U.S. economy, the Dow grew a more reasonable 300 percent in 54 years. And yet, in just 20 years during the 1980s and 1990s, the Dow shot up more than 1,000 percent. That is truly extraordinary!

It is also the quintessential definition of a bubble.

Like most bubbles, the stock bubble originally started to rise for good reasons. But as investors began to fall in love with the profits from stocks, those early gains just made them fall even deeper in love. And not just American investors were smitten; increasing numbers of foreign investors were joining the love-fest, as well. And not just individual investors. Big institutional investors who manage ...

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