I believe the Dow Jones Industrial Average is headed to 150,000 very soon.
Does anyone remember the book Dow 100,000 Fact or Fiction? This book was cool based on the title alone. Or how about the somewhat less exciting and provocative Dow 40,000? Both of these books came out in 1999. The 90’s were such a great time for stocks.
In the 90’s everyone was investing in stocks. I was in my teens and I had my own account and was trading semiconductor stocks and reading the Wall Street Journal and Yahoo Finance every week.
There was clearly “irrational exuberance” causing rapid and broad stock market gains. But is it still possible that the Dow Jones Industrial Average (DJIA) will make dramatic gains in our lifetime?
No More Headwinds
With the election behind us and most of the economic data pointing towards a stronger economy, there are no more headwinds left. The stock market can now move upward with very little resistance.
There are no wars, no economic disasters, no significant political uncertainties, and companies are steadily earning money. Although one could argue that they aren’t earning enough to send the market rocketing higher right now.
But the point is that there is every reason to expect that the conditions are becoming more favorable for an economic expansion.
Stock Market Behaviour
For the past six months or so the market has been bouncing around in a very tight range:
And over the past few years it hasn’t really been performing as well as it could. The stock market has certainly underperformed its historic average of between 8% and 12 % returns.
These facts, in and of themselves, would not mean too much. There have been extended period where the stock market has not increased. And these were followed by periods of massive expansion. But there is really no way to know when these things will happen. There are times where decades pass before meaningful stock market gains occur.
But the stock market has gone through a long enough time of apathetic returns. It’s just my opinion.
Simple Math on the Dow Jones Industrial Average
So why 150,000? It seems like a nice, big, round number. And if you say it slowly it really sounds impressive. Try it.
No but really. I have a real quick calculation that I am using. It’s really simplistic. Overly simple. But I like it and I don’t need it to be right since I’m a committed long-term investor anyway.
Basically in 1983 the DJIA was about 1250 points. And by 1999 it hit 12,000 or so. That’s a pretty big gain right?
It’s actually huge. It is an increase of about 10x. And yes I know I cherry picked the dates. But I actually have some reason for it. In 1983 the stock market broke out of a long and painful malaise. Just like I believe it has recently.
And in 1999/2000 the stock market stopped its meteoric rise upward. It’s been some 16 years since that great bull-market expansion and the stock market has only gained about 80%. That is a CAGR of less than 4% I believe.
So what if the market increased 9-10x in the near future? That would easily get you to 150,000!
I don’t think it’s going to happen in the next year or so. Who knows? Maybe it will take 30 years. My point is that it is very likely to happen and gains of that magnitude would not be without historic precedent. Many people today don’t remember the stock market gains of the ’90’s because they are too young to have experienced it. And they are unwittingly failing to take full advantage of the power of the stock market.
Yes the market can also go down as well. But over the long-term it generally comes back.
Investing for the Long-Term
Even though my current opinion is that we’re in for a massive increase in the stock market in the next ten years, this will not significantly influence my strategy.
I am already highly leveraged in order to position myself for as much growth as possible in my younger years.
And I already invest a steady amount each month and every paycheck into the stock market. This allows me not to worry about short-term moves up or down. Those moves simply don’t matter. When the market goes down I buy more shares at a lower average cost. And when the market goes up I make money on my holdings.
Election Volatility Illustrates Superiority of Long-Term Strategy
During the night Donald Trump was elected, stock market futures dropped dramatically. The market dropped 700 points in a few hours.
For the media this was great. There were a lot of stories about this and there was a lot of speculation as well. What could this mean? Will Trump be bad for the market? Will the stock market enter into a major downward correction? What should we discuss with our financial advisors?
These were all questions being posed by the financial media. And some of the insights provided by the financial press were ok.
But the bottom line was that no one knew what was going to happen the night of the election or the day after. Actually, no one knew what was going to happen with the votes or the stock market.
Both the election outcome and the stock market reaction were complete unknowns. But for a long-term investor it didn’t matter.
The superiority of the long-term strategy was illustrated in these events. For those who took a long-term view there was nothing that needed to be done. No calls to a financial advisor and no worried reviews of one’s portfolio.
In fact, many long-term investors expected there to be volatility and were psychologically prepared for it. This makes for an easy sleep at night and good decisions in the morning!
Good Time to Buy Stocks?
So is it a good time to buy stocks. Sure – why not? Over the long-term stocks tend to produce an annual return of between 8% and 12%. Why wouldn’t it be a good idea to invest in stocks now?
I’ve heard lots of excuses. On one hand someone might say, “Stocks are hitting new highs so they are overpriced and will probably drop soon.” The problem with that logic is that for the stock market to go up significantly would mean it will have to be hitting new highs for years. Just as it did in the late 90’s when it went up by a multiple of 8-10x! It wouldn’t have been wise to try to guess the top at that time.
On the other hand, in a downturn it is tempting to think, “Stocks are going down and I heard a lot of people talk about losing thousands of dollars in the market. It is too risky to invest now.” But isn’t that the best time to buy? When other people are irrationally selling because of fear and listening to stories from friends and colleagues about massive losses, you should be buying stocks at a discount. If you look at the 1929 and 1987 stock market crashes, you will see that buying all the way down would result in earning a positive return within a few short years.
Enjoy a slow and steady investing strategy which not only will let you sleep well at night, but which will let you succeed even when the stock market is going through massive gyrations.
Are you thinking about buying more or less stocks now that Trump is president?
UPDATE UPDATE UPDATE
Check out this article at the Wall Street Journal about Seth Masters who is calling for the Dow to hit 200,000.