Do not look at market without context

By DAVID MOON, Moon Capital Management, LLC
March 24, 2013

After the Dow Jones Industrial Average dropped from 2,246 to 1,738 in one day in 1987, I had a client who refused to put money into equities. He was waiting until the Dow fell back to 1,000. Obviously, it never did.

On a table in my office sits a copy of Benton Davis’ book “Dow 1,000.” Next to it is David Elias’ 1999 would-be classic “Dow 40,000.”

Denton’s book proved to be prescient as, over the 17 years following its publication in 1955, the Dow increased from 400 to 1,000.

Much to Elias’ chagrin (and embarrassment, I hope) the Dow still sits a bit below 40,000.

If the Dow had continued its 1998 growth rate until today, however, it would be at 40,000.

That’s the problem with simply extrapolating recent past events.

The Wall Street Journal wasn’t yet part of my daily routine when the Dow first reached 1,000 in 1972, but I certainly remember the last time (1981.) And although I’ve been around for every kilo-milestone since, the dates and occurrences eventually began to run together.

When the Dow first reached the 10,000 level in 1999 it was big news. The market had sprinted there from the 9,000 level in less than a year.

After reaching that 10,000 milestone in 1999, however, it dropped back below the mark 32 times. And 32 more times it rose above 10,000, most recently in August 2010.

Hopefully that was the last time.

The Dow just crossed the 14,000 level again, after first doing so more than six years ago. Pardon me if I skipped the party, but it is simply a number – no different than Dow 13,967 or Dow 14,108. It is, however, a nice excuse for the design people at CNBC to work up some new graphics.

I bought some food last week for $25. Whether or not that was a bargain depends on whether or not I bought 10 pounds of steak, a half pound of shrimp or a can of Vienna sausages.

Without context, $25 is simply a number.

So is any level of the Dow.

All milestones are not created equal. When the Dow first reached 10,000 in 1999, the P/E ratio of the overall market was a whopping 29.

Stocks sold at 18 times earnings the most recent time the Dow crossed that milestone.

The investment and valuation environment in 1999 was different than what existed in 2010.

In 1982, there were investors who wouldn’t buy Wal-Mart simply because the stock had reached an all-time high. In fact, from 1980 to 1982 the stock more than tripled. “I’m not going to buy a stock right after it triples.”

Since then the stock has increased another 9,000 percent.

Simply reaching a new high is no indication that the stock market is vulnerable. Nor is it an indication that the market is cheap. 14,000 is simply a number. By itself it means nothing.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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