TCS Daily


Hang on for the Long Term

By James K. Glassman - October 23, 2000 12:00 AM

This column originally appeared in USA Today on October 19, 2000 as an invited opposing view to the paper`s editorial.

The stock market has been miserable lately, prompting talk of a "bubble" ready to pop. But dire prophecies have been common throughout this two-decade bull run.

When Fed Chairman Alan Greenspan warned of "irrational exuberance" in 1996, the Dow stood at 6,400. Today it`s at 9,975.02. The tech-heavy Nasdaq has quadrupled in the past five years. Investors heeding naysayers paid a high price.

In fact, when you stake your nest egg on a guess about what`s around the next corner, you are playing a dangerous game, at odds with history. Economists discovered long ago that the market, from day to day, takes a "random walk." You can`t tell what will happen next. Over time is a different story. Hold onto a good, diversified group of stocks, or mutual funds, for five years or more, and the strong likelihood is that you will get high returns at low risk.

Since the early 1980s, investors have learned this truth about stocks and have bid them higher — quite rationally, as economist Kevin Hassett and I argue in our book on stock valuation, Dow 36,000.

No, stocks don`t ascend without interruption, nor do most small investors act as if they do. After all, they have been through 1997, when the Dow fell 7% — 554 points — in a single day; 1998, when the market fell 14% in a month, and 1999, when many tech stocks tanked.

Small investors now understand that such volatility comes with the territory, and they have held on. Bravo.

Why have stocks dropped lately? An oil-price spike, euro decline, Mideast turmoil, earnings worries. Sure, but on the positive side are the Fed`s reluctance to raise interest rates, the dollar`s strength and the productivity boom.

Still, there`s a wild card — politicians intervening in the tech sector, jeopardizing sensational growth. The antitrust suit against Microsoft, roadblocks to a high-speed Internet, new enthusiasm for taxing Internet commerce and the rejection and endless delays of new-economy mergers all point to a longer-term threat to prosperity, what I call a "regulatory recession." Such concern clearly weighs on the market.

But if politicians can restrain themselves, the economy over the long run is resilient enough to overcome most political mischief.

As a result, smart investors should see a sharp stock decline not as evidence of a bubble, but as an opportunity to become a partner in great companies at bargain prices.
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