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May 5, 2012

Everything You Know is Wrong
Posted by Jim Macdonald at 11:36 AM *

And here I thought I wrote science fiction.

“Every stock owner should read this book.”
— Allan H. Meltzer, professor of political economy, Carnegie Mellon University

* A radically new way to determine what stocks are really worth
* Why the Dow is still poised to zoom
* Why the financial establishment is wrong
* Why stocks are actually less risky than bonds
* How to build a maximizing portfolio and invest without fear

“One of the hottest business books around… . It has wonderfully clear explanations of financial theory [and] excellent advice on general investing approaches.”
— Allan Sloan, Newsweek

“It may sound like headline-grabbing sensationalism, but the scholarly and punctilious authors make a persuasive case … the book is highly readable and witty.”
— Arthur M. Louis, San Francisco Chronicle

Dow 36,000 is a provocative and well-written treatise that cannot be dismissed… .”
— Burton G. Malkiel, Wall Street Journal

Dow 36,000: Everything you know about stocks is wrong.”
— Jim Jubak, Worth magazine

The book, as you may have gathered, was Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market . It was published on 01 October 1999, reissued in paperback on 14 November 2000. In proving beyond the shadow of a doubt that the stock market would only rise, and rise more sharply than ever before, authors James K. Glassman and Kevin A. Hassett confidently predicted that the Dow would hit 36,000 by 2005.

1999 was the very height of the dot.com stock market bubble. Dow 36,000’s basic message was that stock prices would keep going up forever. As to how this would happen, it was because every economist who had written since “economist” became a profession was wrong.

You know the cartoon where the business plan has a block labeled “Then a miracle happens” just before the block labeled “Profit!”? That’s what was being presented in three hundred pages of witty and provocative prose, and what engendered such wonderful pull quotes from reviews. The authors were … vague … about the exact process by which the wonderful results would come to pass.

“They laughed at Galileo. But they also laughed at Bozo the Clown.”
—attributed to Carl Sagan
Glassman and Hassett’s particular discovery relied on people suddenly (and for no discernible reason) acting differently than they had since the invention of the stock market. This falls squarely under Sign #7 of the Seven Warning Signs of Bogus Science: 7. The discoverer must propose new laws of nature to explain an observation.
Blackadder: Look, there’s no need to panic. Someone in the crew will know how to steer this thing.
Captain Rum: The crew, milord?
Blackadder: Yes, the crew.
Captain Rum: What crew?
Blackadder: I was under the impression that it was common maritime practice for a ship to have a crew.
Captain Rum: Opinion is divided on the subject.
Blackadder: Oh, really?
Captain Rum: Yar. All the other captains say ‘tis; I say ‘tisn’t.
Blackadder: Oh, Ghod; Mad as a brush.

As we now know, the Dow-Jones high of 11,700 on 14 January 2000 has yet to be exceeded (once one adjusts for inflation). Far from hitting 36,000 by 2005, the market collapsed (as will happen with bubbles) to a closing low of 7,286.27 on 09 October, 2002, less than two years after the paperback edtion of this book hit the streets. Worse was to come: the Dow closed at 6,547 on 09 March 2009, a 12½ year low. As it turned out, everything that anyone who wasn’t Glassman and Hassett knew about stocks was right.

Nothing that you will learn in the course of your studies will be of the slightest possible use to you in after life, save only this, that if you work hard and intelligently you should be able to detect when a man is talking rot, and that, in my view, is the main, if not the sole, purpose of education.
—John Alexander Smith, professor of moral philosophy at Oxford, 1914,
Dow 36,000 was serialized in the Atlantic Monthly; it was a Money Book Club main selection and a Book Of The Month Club alternate selection; the authors got a five-city tour. Glassman went on to found the George W. Bush Institute, “an action-oriented organization focused on independent, non-partisan solutions to America’s most pressing public policy problems.” Hassett remains an economist at the American Enterprise Institute.
Comments on Everything You Know is Wrong:
#1 ::: Bruce Cohen (Speaker to Managers) ::: (view all by) ::: May 05, 2012, 11:49 AM:

There's another law of nature here: If your predictions are right, you will be congratulated, if your predictions are wrong you will be castigated, and if your predictions are so egregiously wrong as to describe a completely different universe from the one we live in you will be lionized, and statues of you will be erected.

#2 ::: P J Evans ::: (view all by) ::: May 05, 2012, 12:01 PM:

Another warning sign is when all the people providing those quotes about how wonderful X is, are people you've never heard of before (and will never hear of again).

#3 ::: Wrye ::: (view all by) ::: May 05, 2012, 12:10 PM:

That's Sagan, all right. Pretty sure it's in Demon-Haunted World. I'll check later today (after Avengers)

#4 ::: Joe Holmes ::: (view all by) ::: May 05, 2012, 12:24 PM:

This reminds me of that old scam:

You send out 1,000 postcards claiming to predict the rise or fall of a certain stock tomorrow, half predicting up and half predicting down. The next day, you send a similar postcard to the 500 addressees who got the correct prediction. The next day, 250 postcards the remaining correct guesses. Etc. After days of this, you're left with a small handful of recipients who hold proof that you correctly predicted a random event over and over again, to an impossible degree of accuracy. You're a genius! This is a group of people who are ready to hand over a lot of cash to hear your next prediction.

It's the same when you've got hundreds of books every year claiming to know what's going to happen to the economy. Every year I read about some book that predicted we'd be in exactly this situation years before it happened. A year or two later, those few books are forgotten, but we get a new batch. It's all monkeys on typewriters.

#5 ::: Jim Macdonald ::: (view all by) ::: May 05, 2012, 12:29 PM:

This should be a reminder that "Non-fiction" is a marketing category, not a guarantee by the publisher that anything in the book is actually true.

#6 ::: DonBoy ::: (view all by) ::: May 05, 2012, 12:33 PM:

You've got some memetic mutation going on there. "Then a miracle occurs" is from a cartoon about scientists. "Profit!" is from the South Park underpants gnomes episode. (And upon Googling I see that in the cartoon, someone refers to the "miracle" bit as "step 2", and the SP episode explicitly lists "????" as #2 in a numbered list, so they're begging to be conflated.)

#7 ::: Stefan Jones ::: (view all by) ::: May 05, 2012, 12:38 PM:

I remember reading an excerpt of this in WIRED, and thinking even then (as a gold collar worker in the still bustling Silicon Valley) that it was bullshit.

When George Bush was [re]elected, I was in a very cynical mood and switched from buying high tech stocks to companies dealing in gluttony (fast food and soda), greed (casinos and lottery technology), and delusion (alcohol).

I did pretty well.

Now I buy shares in companies dealing in things like diapers, soap, and aspirin, and sleep better at night.

#8 ::: Spiny Norman ::: (view all by) ::: May 05, 2012, 01:20 PM:

"As God is my witness, I thought turkeys could fly."

-Arthur Carlson, WKRP Station Manager (h/t J. Zawinski)

#9 ::: Jim Hassett ::: (view all by) ::: May 05, 2012, 04:02 PM:

Being proud of my Irish Hassett ancestors (not to mention my descendants), I'd like to take this occasion to say that I have no known family connection (or any other connection, for that matter) to Kevin Hassett (or his economic and political views).

#10 ::: P J Evans ::: (view all by) ::: May 05, 2012, 04:24 PM:

Anyone who claims to be an economist and claims that the stock market (or any other market of any kind) can provide increasing profits forever, is lying about at least one of those (and IMO both of them).

#11 ::: Steve C. ::: (view all by) ::: May 05, 2012, 04:47 PM:

As J.P. Morgan said, "The market will fluctuate".

Sometimes it flucks up. Sometimes it flucks down.

#12 ::: The Raven ::: (view all by) ::: May 05, 2012, 05:23 PM:

Not science fiction--fantasy.

#13 ::: Bruce E. Durocher II ::: (view all by) ::: May 05, 2012, 06:03 PM:

Looking at what happened, I think the blurbers would be ennobled if this entry was titled "I think we're all Bozo's on this bus."

#14 ::: Bruce E. Durocher II ::: (view all by) ::: May 05, 2012, 06:04 PM:

Aargh! Bozos, not Bozo's.

#15 ::: Erik Nelson ::: (view all by) ::: May 05, 2012, 06:27 PM:

Winner of the pull it, sir, prize.

#16 ::: Rick York ::: (view all by) ::: May 05, 2012, 06:36 PM:

Ain't it amazin' how financial types, particularly prognosticators, seem to think that the law of gravity (metaphorically speaking) does not apply to finance.

Or, as a smarter man than I once said "There's a sucker born every minute."

#17 ::: Lee ::: (view all by) ::: May 05, 2012, 06:46 PM:

Sounds like a canonical example of "extraordinary claims require extraordinary proof". Also, the fact that either of the authors (let alone both) remains employed as an economist gives credence to the claim that economics is not a science.

#18 ::: Bruce Cohen (Speaker to Managers) ::: (view all by) ::: May 05, 2012, 07:17 PM:

"Economics is not a science." Indeed not; in the last couple of decades it's become the cheerleading squad for the financial "industry"1.

1. I am now mentally scarred by the image of Chairman Greenspan in a short skirt and waving pompoms.

#19 ::: lightning ::: (view all by) ::: May 05, 2012, 07:23 PM:

I call it "The Law of Exponential Growth" -- if something can't go on forever, it won't. The Dotcom Boom was a bubble -- everybody knew that. The question was when the bubble would burst. Guess right and you're rich; guess wring and you're broke.

We need to come up with a way to get folks like the authors of "Dow 36000" to put some skin behind their prediction. "OK, you say the Dow will hit 36,000 by 2005. What will you do if it doesn't?" Give a million dollars to charity? Eat a toad on live TV? Spend the rest of your life working in a leper colony in Zimbabwe?

Having to take a cushy job at a right-wing think tank doesn't make it.

#20 ::: Kelly ::: (view all by) ::: May 05, 2012, 08:15 PM:

"Look around the table. If you don't see a sucker, get up, because you're the sucker,"
Amarillo Slim. Died April 30th.

That's for all those who bought into the 36K BS and the whole ethos of the shrub years.

#21 ::: Bill Stewart ::: (view all by) ::: May 05, 2012, 08:19 PM:

I would strongly disagree with your assertion that "As it turned out, everything that anyone who wasn’t Glassman and Hassett knew about stocks was right."
Most of what most of us knew about stocks back then was still wrong, but like dysfunctional families, it was just wrong in many different ways. (Otherwise, the rest of us would have made money, or at least not lost it.)

Unfortunately for the rest of you, looking at my investment decisions and doing just the opposite doesn't win either...

#22 ::: Jim Macdonald ::: (view all by) ::: May 05, 2012, 08:45 PM:

From the front cover of the paperback edition of Dow 36,000:

A Businessweek Bestseller

"Rock-solid investment advice.... Long-term investors can place it on an altar next to the works of Benjamin Graham and Peter Lynch, as well as Warren Buffett's annual homilies to his Berkshire Hathaway investors."
--Knight A. Kiplinger, Kiplinger's Personal Finance Magazine

#23 ::: Nancy Lebovitz ::: (view all by) ::: May 05, 2012, 09:36 PM:

Nasim Taleb (author of The Black Swan, a book about hard-to-predict events with large effects) has a new book about anti-fragility (systems which get stronger when challenged), and one of the topics is going to be the problem of people who have influence without any responsibility for being right.

#24 ::: thomas ::: (view all by) ::: May 05, 2012, 09:46 PM:

if something can't go on forever, it won't.

Economists do understand this. They know it as Stein's Law: "if something cannot go on for ever, it will stop".

#25 ::: Linkmeister ::: (view all by) ::: May 05, 2012, 10:11 PM:

Somebody's law of forecasting:

"If you don't forecast right, forecast often."

#26 ::: Bruce Baugh ::: (view all by) ::: May 05, 2012, 10:53 PM:

Jim, you and Debra write science fiction. This book at hand, though, is paranormal romance, between a boy and his money, the latter being possessed of various miraculous powers. And it's not the kind of paranormal romance with solid world-building or attention to narrative consistency. The boy is very much a Mary Sue/Marty Stu figure, and his love interest is capable of doing literally anything the plot requires and incapable of doing anything the author dislikes.

#27 ::: Henry Farrell ::: (view all by) ::: May 05, 2012, 11:44 PM:

John Sladek said very nearly the same thing in The New Apocrypha twenty-odd years before The Demon Haunted World.


Palmists are of course in no doubt as to who was right. As with all cranks, they feel they haven’t been given a fair hearing and that orthodoxy is ganging up on them. [quoting palmistry author Noel Jaquin] “The reward of the pioneer is so often the ridicule of his fellow-men. We are not very much more just today. Of recent years men of genius have been deprived of their living and literally hounded to death by the ridicule of their more ignorant brethren.” How true, how true. They laughed at Galileo, they laughed at Darwin, they laughed at Edison … and they laughed at Punch and Judy.

Dunno whether Sagan later adapted this for his own purposes, came up with nearly the same metaphor independently, or has just become a quote-magnet for difficult-to-attribute pithy sayings about science in the same way as Sam Goldwyn and Yogi Berra.

#28 ::: Henry Farrell ::: (view all by) ::: May 05, 2012, 11:48 PM:

Not, to clarify a muddy clause, that Berra's or Goldwyn's rep was for science quotes in particular.

#29 ::: Dr. Hilarius ::: (view all by) ::: May 06, 2012, 12:43 AM:

The continuing success of this kind of forecasting is a subset of the more general phenomenon of "failing upward." No matter how often a pundit is wrong, no matter how egregious the failure, the reward is promotion, respect, and if not a newspaper column then a job at a think tank. To succeed you simply need to make predictions that support whatever elite you wish to join. The general public has a short memory, the mass media's memory is nonexistent, and all your errors fall into the memory hold.

#30 ::: albatross ::: (view all by) ::: May 06, 2012, 12:52 AM:

In general, if you can reliably predict just about anything about the future of financial markets, you can gather truly obscene amounts of wealth. Someone selling investment newsletters or books for a living (or to supplement their think tank income) presumably is not sitting on top of an unlimited fountain of wealth. If you happen to sit between Warren Buffet and George Soros on an airplane, it is conceivable that you might get some crumbs from that level of insight into markets and their future behavior. (Though never forget that Bernie Madoff, presumably a man who might plausibly have had such insight, couldn't provide consistent better than market returns without running a Ponzi scheme.)

A very entertaining book along these lines is Why the best-laid investment plans usually go wrong by Harry Browne. He had been one of those guys who made a run of successful preditions (because his political beliefs led him to expect inflation and recession at the same time right at the point where that happened). In this book, he went through all the different reasons why nobody could really predict the markets or economy, though it was possible to have some insights or understanding in particular cases or situations. (For example, if you think inflation is likely in the future, it's nice to have some expert insight into what investments would do well or poorly in such a situation, and how risky they would be if you were wrong.). He mentioned the 1000 letters trick--elsewhere I have seen that described as the "brilliant penny scam."

#31 ::: David Goldfarb ::: (view all by) ::: May 06, 2012, 12:54 AM:

I would have said that Mark Twain and Benjamin Disraeli were more quote magnets than Berra or Goldwyn. (And a special mention of Booker T. Washington.)

#32 ::: albatross ::: (view all by) ::: May 06, 2012, 01:06 AM:

It's worth remembering that media commentators, think tank experts, etc., are typically being paid and given access to TV cameras by people whose interests and incentives are not mainly production of high quality understanding or education or correct predictions. In a business where most of the professionals make their money mainly on transaction fees or complicated deals that subtly take advantage of the less sophisticated participant, someone who writes a book encouraging people to go all in into the market may find that he has a lot more friends than somene who writes a book pointing out that professional investors do not reliably do better than (literally) a portfolio of stocks picked out by throwing darts at a stock listing page. In a business where viewers tune in for convincing hot stock tips, guests will be booked who will make convincing-sounding stock tips for amateur day traders. In a business where audiences come for the controversy, guests will be booked who talk up a controversy in easily-understood terms. And so on.

To a first approximation, the only people on TV whose first job is providing good information are the people on occasional public access channels where you can watch high school or college class lectures. Even news organizations have mixed jobs--along with informing you, they need audiences (so scaring or enraging you is pretty helpful) and advertisers (so some stories are pretty hard to tell because you risk losing a bunch of your commercials) and sources (so don't p--s off anyone too powerful or all your leaks will stop).

#33 ::: Linkmeister ::: (view all by) ::: May 06, 2012, 01:17 AM:

albatross, is that Harry Browne the same guy who was a consistent gold bug in the 1970s, selling a newsletter to subscribers for about $500 a year?

When I was on Kwajalein a lot of my colleagues subscribed to that thing, bought Krugerrands every paycheck, and generally thought they were brilliant (all the while making $5/hour, just like I was).

#34 ::: albatross ::: (view all by) ::: May 06, 2012, 02:01 AM:

Yep. As I understand it, also a writer of several books predicting stagflation correctly, as well as not ever realizingthat the inflation would eventually be gotten under control. Browne and his ilk were like Winston Churchill--they were wrong about a lot, but got one really big thing right at exactly the right time.

Browne also wrote a self-help book which was probably no crazier than the average self help book, but which notably discouraged involvement in politics as a trap (since success or failure depended on other people's decisions that you mostly couldn"t influence.). He later ran for president twice as a libertarian, presumably without the support of those who took his previous advice to heart. He also had some investment theory that amounted to dividing the economy into four possible states (inflation/deflation and boom/recession) and hedging against each one in some way. I imagine this works till the economy falls out of your model in some way (like having different parts of the economy boom and bust at the same time, or something), and that the hedges start costing you a lot over time when you're putting something like a quarter of your investments on hedging something that probably has a probability of occurring of much less than 0.25.

These books were all lying around my house when I was a kid and began to get interested in politics and economics. My parents weren't remotely goldbugs, but I guess this stuff was being read in their social circle or something.

#35 ::: Peter Erwin ::: (view all by) ::: May 06, 2012, 08:18 AM:

I am now mentally scarred by the image of Chairman Greenspan in a short skirt and waving pompoms.

For some reason, this has collided with my memory of an offhand remark in a book review by John Leonard back in 2000, suggesting that "... an anthropological inquiry into the stock exchange as a form of superstitious magic is greatly overdue, with Alan Greenspan as a Magus or a Fisher King", so that I am now imagining the Fisher King in a short skirt, waving pompoms[*].

[*] Possibly while out in his boat, fishing.[**]

[**]No jumping, though, 'cause of the wound.

#36 ::: Nancy Lebovitz ::: (view all by) ::: May 06, 2012, 11:24 AM:

More about the difficulties of prediction. Tetlock performed the inhumane experiment of tracking pundits' predictions for accuracy.

#37 ::: Tangurena ::: (view all by) ::: May 06, 2012, 02:24 PM:

One of W's plans was to piratize Social Security by diverting your FICA withholdings to Wall Street. The sheer volume of money flowing into mutual funds and stocks would have resulted in the DJIA hitting 36k before W left office.

It only would have kept going up until large groups of people started selling off to pay for retirement, and when more folks are retired than are working for a living. Then the magic power of leverage would have resulted in the Dow dropping.

Browne's books and philosophy were influential to Robert Ringer (among others), RR wrote a lot of very popular books in the 70s (example: Looking Out for Number 1 and Winning Through Intimidation)

#38 ::: David Harmon ::: (view all by) ::: May 06, 2012, 03:04 PM:

Stefan Jones #7: When George Bush was [re]elected, I was in a very cynical mood and switched from buying high tech stocks to companies dealing in gluttony (fast food and soda), greed (casinos and lottery technology), and delusion (alcohol).

That suggests a new stock index: the Seven Deadly Sins Index. (7DSI)

#39 ::: Nancy Lebovitz ::: (view all by) ::: May 06, 2012, 03:46 PM:

Ringer's books were less awful than his titles suggested. A lot of his advice added up to doing excellent work and insisting on getting paid for it.

He eventually said he regretted letting his publisher talk him into aggressive titles-- this might be checkable, since I believe he started out by being self-published.

#40 ::: Seth Gordon ::: (view all by) ::: May 07, 2012, 12:00 PM:

Stefan Jones, David Harmon: There is an actual mutual fund, Vice Fund, that focuses on aerospace/defense, gaming, tobacco, and alcohol stocks. (Top holdings as of March 31: Lorillard, Wynn Resorts, Altria, Philip Morris, Las Vegas Sands.)

It performs pretty well against the S&P 500... until you take into account the real vice in the fund, namely, its management fees.

#41 ::: Erik Nelson ::: (view all by) ::: May 07, 2012, 10:01 PM:

Main post and comments 3 and 27 mentioning Sagan's / Sladek's "they lauged at..." quote;

Mr. O'Malley says a variant of that in Crockett Johnson's Barnaby (1940's)

#42 ::: Henry Troup ::: (view all by) ::: May 07, 2012, 10:34 PM:

That rhetoric about a permanent change and the market only goes up (and forever) came out in 1928, too. If I'd recognized it, the c. 1999Wired "Long Boom" cover would have prompted me to cash out Nortel (I worked there) at or near the peak of over $120, rather than staying in for the ride. Sold my last Nortel stock at $8 on the downside. Some did worse!
Bubbles used to be a once a generation thing, but now we're having them every decade or so. Maybe I'll get to recognize the next one. Maybe the horse will learn to sing.

#43 ::: wkwillis ::: (view all by) ::: May 08, 2012, 06:42 PM:

America has a balance of payments problem.
Our balance of payments problem will renormalise to the point where our exports pay for our imports.
We will need to build mines, processing plants, and factories to make those exports, or at least to replace those imports.
The mines will be build where the minerals are, the processing plants will be built where the energy is cheap, the factories will be built where the housing is cheap, none of which is going to be in the big cities of the coastal areas.
When is the question, not whether.
Don't ask me for a date for all this to go down. It's a political decision by the Chinese, Arabs, Russians, Japanese, etc.

#44 ::: Alex ::: (view all by) ::: May 10, 2012, 05:01 AM:

Oddly enough, if you search for Dow 36,000 on Amazon.com, you can buy the hardback for less than the paperback. And you can get a used copy for $0.01, which is almost worth doing.

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