Ganesh - I am a new won fan of Glassman's book 'Dow 36,000'. What many people won't guess from the title is that he is a very conservative, long time writer for the Washington Post financial section.
The basic proposition is this: stocks are hugely discounted to bonds because they are considered far more risky. Yet, long term, stocks actually return 7% more than bonds. There is no 20 year period where the S&P 500 lost money.
If stocks were considered only as risky as bonds, the Dow would be 36,000. The reason is the magic of compound growth. A stock with a $1 return, growing at 6.5%, has a present value of about $100 if valued like a bond; this would be a pe of 100, thus Dow 36,000 - the djia w/ a pe of 100. Seen another way, a stock returning 1% with an average growth rate, should cost about the same as a bond paying 6%.
What would cause the risk premium to go away? Millions of individual investors who are crashing Wall Street's party, sharing info on SI, on-line trading, the Motley Fool, etc. In general, the education and democratization of the financial markets.
Glassman likes Johnson and Johnson, Campbell's Soup, Tootsie Roll and Fannie Mae while waiting for the Dow to reach the new plateau in the next 5 years. My choices are a little more aggressive.
Regards,
Tom
p.s. re: cash remark - I raised cash in early January, anticipating the typical Feb-Mar dip. |
