On a New High and an Old Price
One of the comments to my previous post, The Human Index, prompted this post.
As the Dow flirts with a new high (and the financial media tests everyone’s patience), it’s worth remembering how far the average investor has fallen and why. In this post, I discuss how far the fall has been.
As for why – that’s a topic that underlies everything written on this blog. Investing is about the price paid and the value received. If valuation seems a dry topic in the abstract, it’s worth remembering the real world cost of ignorance.
Once again, I quote from Graham. I’ve used this quote before. It’s my favorite Graham quote. It’s also the best thing you can learn from this blog (I’ve bolded two phrases of immeasurable importance):
“…the influence of what we call analytical factors over the market price is both partial and indirect – partial, because it frequently competes with purely speculative factors which influence the price in the opposite direction; and indirect, because it acts through the intermediary of people’s sentiments and decisions. In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.”
The view of the market to the average investor isn’t really comparable to the view of the market to the average dollar. Individuals don’t have their assets distributed evenly across the various equity issues available in the major public markets. A lot of individuals who have held every share they had six years ago are nowhere near where the Dow is today, because they own the wrong Dow stocks and they own very poor performing non-Dow stocks.
List A
Eastman Kodak (EK)
General Motors (GM)
Intel (INTC)
Microsoft (MSFT)
Home Depot (HD)
List B
Altria (MO)
Caterpillar (CAT)
United Technologies (UTX)
Boeing (BA)
Exxon Mobil (XOM)
Which did more people own in 2000, List A or List B? Which do more people own today? And, in 2000, which list did people think would perform better?
List A is the worst performing Dow stocks since the last high; List B is the best performing Dow stocks.
Other notable issues include Disney (DIS), McDonald’s (MCD), and Coca-Cola (KO). These are the kind of stocks people would love to buy and hold forever. They are sentimental favorites. They are also below where they were trading at the last high – although, they are about in the middle of the pack for Dow stocks.
So, I’d have to say the Dow doesn’t really measure the performance of individual investors’ accounts at all. There’s a selection bias for individuals that isn’t reflected in the DJIA. Obviously, there are also some popular stocks that aren’t part of the Dow.
Recently, internet stocks are the best example. Generally, they’ve performed miserably.
To reinforce the point, I’ll include a chart. Here’s a chart of two indexes and two stocks.
The Indexes: Dow, NASDAQ
The Stocks: Cisco (CSCO), Berkshire Hathaway (BRK.B)
I choose Cisco and Berkshire, because they have roughly the same market cap today and both are really, really big companies that aren’t in the Dow.
See a chart showing Berkshire, Cisco, the Dow, and the NASDAQ since the last Dow high.
My point: the market looks a lot different if you planned to buy and hold Berkshire, Cisco, the NASDAQ, or the Dow at the last high for the Dow.
Unfortunately, when I think back about the people I know who had previously had no interest in the market and then started buying in 1998 and 1999, they didn’t mention Berkshire. They did mention Cisco. They didn’t mention the Dow. They did mention the NASDAQ.
While this unscientific study of mine is necessarily arbitrary and backward looking, I should point out that I refrained from mentioning stocks where the business itself turned out to be an utter failure. I picked a stock (Cisco) where if you bought all your shares in January 1997 or January 1998, you’re about even with where you’d have been if you’d bought shares in Berkshire in January ’97 or ’98 – (in both cases, you’re whipping the indexes).
But, you had to buy in January of ’97 or ’98, not in January of ’99 or 2000. That’s the problem. So, in a lot of ways we aren’t near the levels of 2000.
There’s also one other point: the dollar is worth a whole lot less.
Your stocks may be quoted at the same number of dollars; but, those dollars aren’t exchangeable into the same house, college education, or blissful retirement. That’s the kind of things your stocks are supposed to buy you. That’s why the average American owns stocks. Americans have been told to save, index, and hold. Those who did that during the millennium bubble lost a lot of ground over the last six years (mostly in the form of time).
So, we’re really a lot farther from those crazy days than it first appears.
Most investors are six years closer to death – and none the richer.