| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
Money managers who have learned how to evaluate the twenty-first century companies, whose clients are the pension funds worth trillions of dollars, will be huge investors in this marketTHE CAPITULATION OF THE FIRST DOMINANT INVESTMENT SYSTEM 1896 was the first year of the Dows dominance and the bond markets last. Still, from 1896 to 1901, bond prices rose astronomically amid universal enthusiasm for investment created by the Dows discovery phase. A comparison of the events of the period with the twentieth century is outlined below. Oblivious to the bitter end, most investors finished off both the Dows and the bonds dominant periods by enthusiastically bidding up prices. The result is the remarkable similarity in the price trends of the two systems at the end of their periods of dominance, as shown in Figure 2.8. According to Sydney Homer in his definitive book on the bond market,14 the first protracted bear market for bonds officially began in 1899, but this did not become noticeable until 1902. Similarly, in 1998 the Dow stocks listed in the following table peaked and, from the perspective of technical analysis, evidenced major structural breakdowns in their previous upward trends. The shift to a downward bias went unnoticed by most this time as well. It was concealed by the outstanding performance of companies like IBM, who were increasing productivity by replacing old business systems with the new twenty-first century model.15 What can we expect the Dow Jones Industrial Average to do in the future? If it continues to act like the bond market did after relinquishing its own dominance (see Figure 2.9), the answer can be found in Figure 2.10, which shows the course of the bond market from 1899 to 1920. Figure 2.10 shows where the Dow would go if it follows a parallel course. By themselves, the graphs may not signify much, but taken together with the observations of Warren Buffett, Ron Ryan, and Rob Arnott, we can draw these conclusions. Expecting better-than-average returns from the Dow even when it reaches bargain-basement prices is a mistake. Expecting the Dow and stocks of that ilk to outperform all other investments over the long term is a mistake. The best course is to consider carefully the merits of each stock on its own, disregarding the fact that it is a part of the Dow or the S&P 500 index. CROSSING THE FRIENDLY FRONTIER The seepage of energy out of the Dow at the end of its dominance bears no resemblance to the power it had during its formulation phase. There were healthy rebounds out of each correction. We have not discovered a single economic historian who does not marvel at the general mood of confidence that existed during the first two decades of the twentieth century. It is typically described like this: marked by a sustained sense of prosperity. A few short downturns did not disrupt the prevailing optimism.16 The first of these downturns ended the Dows discovery phase and marked the beginning of the formulation phase. During just one week of this rally the NASDAQ rose 14%, the second highest percentage increase ever,17 whereas the Dow rose only 3.4% during the same period. This hints at the power that NASDAQ stocks are building during this phase. Most are missing these signals to the prosperity ahead. We have not found one person outside our industry and very few within it who even realized that this historic increase occurred. THE SECOND MAJOR FORMULATION PHASE CONTRACTION In shifting back a century to see what happens next, we find the Dow in another formulation phase correction of -46.01% lasting 28 months. This occurred between June 17, 1901, and November 13, 1903. It was blamed on a 23-month business contraction in 1902.18 In 1903 U.S. Steel missed a dividend, and a merger in the shipbuilding industry fell through, exacerbating the decline that was called the Rich Mans Panic.19 We find ourselves today (August 2001) at the beginning of a similar business contraction and a similar market decline. Chapter 5 explains the economic parallels between the 1902 contraction and todays; without this information, however, the coincidence of the timing by itself gets ones attention. The NASDAQ has declined 16% since its historic May 2001 rally, and business has slowed considerably. This economic contraction will further stress an already deteriorating old dominant investment system, making it likely that we will see a major disruption of at least one or two companies like what occurred with U.S. Steel a century earlier. This, on top of reports of earnings declines from many companies, is likely to send the NASDAQ lower. But there is some very good news ahead. The Dows 30-month decline that began in 1901 was eventually followed by a 144.4% rally. A similar rally today could put the NASDAQ around 3500. The Dows second formulation phase rally is illustrated in Figure 2.12. DIVORCING THE DOW The next major event in the Dows Formulation Phase occurred in 1907, when unemployment surged from 2% to 8% in 1908.20 This setback of panic proportions was caused by deceitful and naive banking practices21 and sent the Dow falling 48.54% over 22 months from Jan uary 19, 1906, to November 15, 1907. The Dows formulation phase reversals were viewed as devastating at the time, but in hindsight economists agree they were only potholes in a gently climbing road of prosperity. The stable economic base created by the new productivity of the industrial age is what made it so. Digital resources give us that same productive boost and economic stability today. Those that overreact to market corrections will find themselves on the sidelines when the NASDAQ stocks surge out of these troughs. Heres how the Dow recovered from the panic of 1907 caused by the banking industry: War drains a countrys resources. It is expensive in terms of human energy and financial cost. Productivity is spent on things that will either be destroyed or never used again. For the Dow to have doubled in value by 1916 is only another testament to the underlying prosperity of the early years of the Dows dominance. This stands in contrast to the Dows waning resilience years later as it matured. In 1973 the Dows high close on January 11 was 1051.70. The Vietnam War ended in 1975. The Dow went nowhere for 10 years, only reaching 1070.55 by December 27, 1982. With its youthful vigor depleted, the recovery from the trauma of war this time took a decade. IF IT S NOT ONE THING . . . The NASDAQ has its own atmosphere, which will respond in its own way to unforeseen events over the next several years. Everyone will be affected by them whether invested or not. What NASDAQ companies do will impact interest rates, real estate, and jobs. What we learn from the Dows formulation phase is that negative events may last a year or two and then be quickly compensated for by a vigorous rise in the performance of the dominant investment. This was true even in the worst-case scenario of World War I. This knowledge will help in making important personal and familial economic decisions unrelated to the stock market. The techniques to make the most of the formulation phase as an investor are explained in Chapter 3. HOW LONG WILL THE FORMULATION PHASE LAST? We know that events occur faster today than they did a century ago, so we have to come up with a way to convert Dow years to NASDAQ years. All we have to base a conversion factor on is how long the NASDAQs discovery phase lasted compared to the Dows. The NASDAQs discovery phase lasted 27 months, 27% less time than the Dows 37month discovery phase. Putting this information into the formula (A B)/(A + B), we can estimate the duration of the NASDAQs formulation phase. The result is 8.8 years.22 If we do not have a protracted disaster like World War I, todays NASDAQ formulation phase could be shorter. By substituting World War Is 29-month bear market for a 12-month bear market, we shorten NASDAQs formulation phase to 8.3 years. This means that one NASDAQ year equals about 2.5 Dow years, putting the beginning of the acceleration phase between 2008 and 2009. Colleagues have said that our estimate is far too long. They argue that we are not giving enough weight to the evolving speed of technology, citing examples such as if transportation (railroads) had evolved at the same speed in the nineteenth century that digital technology has today, we could have put someone on the moon in 1904. Our response is that having technology is one thing, but creating a successful commercial application is another. Besides, time flies. The formulation phase is happening to us right now, and there are only a few years left to profit from it and get in position for the acceleration phase. THE ACCELERATION PHASE: THE ROARING TWENTIES IN THE TWENTY-FIRST CENTURY Actually, it will be the Roaring Nine, Ten, and Eleven. Using our formula, we calculate it will last about three years, so it should be over around 2011. There will be high volume and active investor participation in the acceleration phase. Who will those investors be? Many of them will be employees, executives, and directors of NASDAQ companies themselves because they will understand what their stock is really worth. Money managers who have learned how to evaluate the twenty-first century companies, whose clients are the pension funds worth trillions of dollars, will be huge investors in this market. In January 2000 the MIT Sloan School of Management launched a five-year $10 million program to understand the new rules of the shifting business landscape . . . focusing on the growing importance of intangible assets including brands, relationships, and knowledge.23 The Wharton School of Finance, the University of Chicago, and the Peter F. Drucker Graduate School of Management are committed to rethinking how a companys management should be evaluated. During the next six years their discoveries will be disseminated to mutual fund managers around the planet, all having access to NASDAQ stocks 24 hours a day (see Figures 2.13 and 2.14). A problem arises in using the NASDAQ composite to represent the new market culture. We explained in Chapter 1 how the major market indexes count the performance of the biggest companies a lot more than they do the smaller ones. Because the realize, capitalize, customize business model allows smaller companies to be more productive than large ones, an appropriate index should give them at least equal credit. To solve this problem, we selected 60 stocks from a variety of sectors that represent the twenty-first century economy. Each companys business model meets our definition of realize, capitalize, customize. We call the index Digital Dow2. Digital innovation is driving the twenty-first century economy; Dow acknowledges the evolutionary nature of investing; and the superscript explains the new dominant investments exponential increase in energy over the old investment culture. The intent is for the index to represent important sectors of the modern economy. This is where it differs from other popular indexes. Where the S&P 500, for example, includes industrial, transportation, financial, and utility sectors, the Digital Dow2 is expanded to include new sectors such as education, merchandising, and healthcare, to name just a few. Although this entire book is devoted to explaining why financial matters should now be viewed differently, Chapters 7 and 8 make it especially clear why any index that holds itself out as being representative of the market must include these new economic sectors. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |