Has DOW 20,000 Come Too Soon?
Tuesday, January 10th, 2017
Emotions play a large role in the average investor’s poor long term performance. Over the last 20 years, the S&P has gained on average 9.9% per year. Compare that to the average investor’s result of 2.5% per year and you begin to question why there is such a large discrepancy.
One of the main reasons for this discrepancy is investors allow the emotion of fear to dictate their investment decisions. The Dow Jones is now on the cusp of 20,000 and many investors fear the market has entered bubble territory. Many believe we have simply come too far too fast.
We went back to November 14th, 1972 when the Dow reached 1,000 to look at various time frames for the Dow to achieve new heights and break other psychological barriers.
It took approximately 14 years for the Dow to double from 1,000 to 2,000. Within this time frame we saw the demise of what was known as the Nifty Fifty. Once thought of as “one-decision” stocks, many popular companies such as Xerox, Polaroid, Disney, and McDonald’s became very expensive based on their earnings. The Nifty Fifty helped propel the Dow from the late 1960’s until 1972. The market then witnessed the collapse of 1973-1974 as the Dow fell 45% during those two years. The Nifty Fifty had sent the market to an unsustainable level based on earnings, which forced the market to reset and elongate the time it took for the Dow to double from 1,000 to 2,000.
On February 23rd, 1995, the Dow reached 4,000. This marked about an 8 year stretch for the Dow to double.
In the later part of the 1990’s, the Dow exploded and companies became extremely overpriced. The Dow hit 8,000 on July 16th, 1997 just 2.5 years after reaching 4,000. It did not stop there, as the Dow continued its march to 10,000. It reached this threshold on March 21st, 1999. Once again, we witnessed a short doubling of the Dow as it only took 3.5 years for the Dow to appreciate from 5,000 to 10,000. This time frame is commonly referred to as the Tech Boom. Tech companies such as Microsoft, Cisco, and Qualcomm were all major names that had seen rapid appreciation in their stock prices.
Fast forward to today, approximately 17.5 years after reaching that 10,000-point milestone and we have yet to double and reach that 20,000-point threshold. We came extremely close, reaching 19,999.63 on Friday, January 6th, 2017, but still did not achieve that mark. Looking back at the various 1,000 point markers and the time frame it has taken for the Dow to double from those markers, we notice an average time frame of 10.45 years.
Based on historical time and the averages we should have hit 20,000 years ago, so why has it taken so long for the Dow to reach 20,000?
The Tech Boom was followed by the Tech Bust. Many of those tech companies that carried the markets to new highs did not have the earnings to justify their prices. When looking at earnings relative to stock prices, a stock can move in one of two ways. Either earnings grow or we see a multiple expansion in the Price/Earnings ratio. The latter was the driver for the Tech Boom as the Price/Earnings ratio reached all-time highs during this time period. This greatly overappreciated the market and essentially made a collapse inevitable. Following 1999, we witnessed 3 consecutive losing years in 2000, 2001, and 2002.
In 2008, we saw the Great Recession arise and witnessed the market fall over 38% for the year. During this event, we saw the collapse of the housing market, coupled with a near complete collapse of our banking system.
It is important to realize that 20,000 is just a number. It is far more important to understand what you are paying for a company in terms of its earnings, sales, book value, and cash flow. The two major setbacks we have suffered in the last 10 years have helped reestablish just valuations in the market, which should allow for some continued growth moving forward.
The important piece of advice is to not make emotional decisions and allow the numbers to provide you comfort. At Wilsey Asset Management, we buy small pieces of large companies. Just as you would with your own small business, we really understand the ins and outs of all the companies we own. If you understand what you own, you will be far less likely to allow your emotions to control your investment decisions.
Moving forward we believe there are many great years ahead of us when it comes to investing. Just like we are going to hit Dow 20,000, we will hit Dow 50,000, Dow 100,000 and so on and so forth.
Do you have a question or a company you'd like us to take a look at? Email us at Brent@WilseyAssetManagement.com or Chase@WilseyAssetManagement.com.