Wyndham Books, 1982; 206 pages
ISBN 0-671-43224-9
When Dow 3,000 was published in 1982, it was advertised in the back pages of The Wall Street Journal, where dubious books about economic collapse, market timing and investing in gold were often promoted. As the title implies, it predicted that the Dow Jones Industrial Average would increase to around 3,000. The index was around 1,000 at the time, so achieving that prediction would require it to triple.
With the hubris of youth, I told my friends that this was ridiculous. I had recently earned a bachelor’s degree in finance, so I was pretty confident I knew what I was talking about. Here, it seemed, was yet another case of overreach by financial advisors who would push the envelope unmercifully to get customers to buy stocks.
I spent an interesting afternoon paging through this book recently. To my surprise, it's far from being promotional. It's actually a careful analysis based on fundamental valuation methods and a seven-year forecast horizon: Dow 3,000 by year-end 1989.
Readers of my generation will recall the horrendous conditions in place when this book was written. In late 1980, when the manuscript was submitted for publication, U.S. markets were in turmoil, beset by double-digit inflation. 30-year Treasury bond yields were in the 12% to 14% range. The Dow Jones Industrial Average was trading well below its book value, and at less than 8 times earnings.
In this bleak landscape, Blamer and Shulman did a two-pronged valuation analysis.
- Method #1 was a price-to-book value analysis. The authors presented historical data showing that over long periods, the Dow tended to trade at or above "inflation-adjusted" book value. (Note the focus on inflation, which is everywhere in this work.) Then they projected the inflation-adjusted book value of the index seven years into the then-future, based on assumptions about return on book value, dividend payout and retained earnings. Result: a projected book value of 3,150. Assuming the market would eventually trade at a price-to-book value ratio of 0.95, it's easy to get to Dow 3,000 with this valuation method.
- Method #2 was a price/earnings forecast. Blamer and Shulman assumed that the price-earnings multiple for the Dow would eventually return to a level consistent with its 60-year average, and that the earnings of the Dow Jones companies would rise in line with inflation. Applying a P/E multiple of 14 to their earnings forecast, they projected the value of the Dow to be around 3,400 by year-end 1989. They then presented an earnings forecast for each of the companies in the index.
Of course the devil is in the details. Blamer and Shulman's forecast assumed an 8% annual inflation rate. That's understandable in light of what was going on when the book was written. But the actual inflation rate turned out to be 3.7% over their forecast period. So something else must have happened to offset that faulty assumption, because the authors of Dow 3,000 came very close to being right about the stock market recovery. Although the Dow Jones Industrial Average did not reach 3,000 by year-end 1989, it did so the following year. In the treacherous realm of market forecasting, that's a fine outcome.
But what I marvel at is how far the index has climbed since then. As noted previously, the Dow closed at around 26,100 yesterday. An investment of $1,000 in the Dow at year-end 1981, just before Dow 3,000 was published, would be worth an eye-popping $29,832 today. That's a compound annual return of 9.86% for 36 years.
I am humbled. All those years ago, if I’d thought it out carefully and applied what I’d learned in my finance classes, it would have been apparent that "Dow 26,000" was within reach over a 36-year forecast horizon. Regrets aside, this is a great example of the power of compound growth. If you can grow something – anything -- at 9.86% per year for 36 years, you’ll get an amazing result at the end of the line.
Historical data courtesy of Macrotrends.net:
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