Opinions and Information

About a month ago I suggested that investors should think about Dow 20K. 

While I recommend reading the prior article, the major theme was that the average investor was overwhelmed with negative news, negative media, negative blogs, and a boatload of Dow 5000 predictions.  This article updates the thesis and provides a small quiz, especially for the skeptics.

The market bias is all wrong, and people should realize the facts.  The Dow is much more likely to double than to get cut in half.  It is only the recent history that leads people astray.  If you have some time before you need your money, the historical odds are with you.  The allegedly bullish representatives on TV talk about a ten percent gain this year while the bears suggest that you will lose half of your money.  The media message is biased, and the average investor is scared silly.

My Objectives

I have several objectives in mind by introducing the target of Dow 20K.

1. It is a prediction that will serve you well;
2. If you take the Dow 20K challenge seriously, you will be forced to think instead of being a blind follower;
3. Focusing on what needs to happen for Dow 20K will get you thinking the right way; specifically,
4. What if things get better?  Perhaps not like a "light switch" but gradually?

Asking the Right Questions

The bias is inherent in the situation.  The problems are known.  If you write for a major publication, you are rewarded for analyzing the negagativity.  If you go on TV, you are expected to parrot the analysis of problems.  This makes you seem smart.

By contrast, the solutions are vague and unknown.  If you even talk about them, all of the "hot shots" are skeptical.

That should be your clue to pay attention.  Repeating the known news does not make you money.  Try asking these questions:

• What if unemployment falls to 8%?
• What if the annual budget deficit is reduced?
• What if housing prices and sales show a clear bottom?
• What if mortgage rates remain low?
• What if politicians negotiate a compromise on tax increases?
• What if Europe stabilizes?
• What if China and other emerging countries resume a solid growth path?
• What if earnings for US companies continue to surge, leaving the 10-year trailing earnings in the dust?
• What if the US rationalizes immigration?

If you have not thought about these possibilities, you have a fixation on negativity.  My Dow 20K concept is designed to set you free -- to get you thinking about the long sweep of history and the potential for success.  If even a few of these things happen, what would be the market reaction?

Meanwhile, I am not yet ready to provide a specific time frame, although I am working on it.  I will not and cannot elaborate the entire reasoning in a single 1000-word article.  Those joining me on the analytic quest will open their minds and make money.

A Pop Quiz from the Old Prof

I know that there are many Dow 20K skeptics, so here is a a little quiz (answers at the end) devised especially for you:

1. Take out a pencil and start writing.  How many of the Dow stocks can you name?
2. Do you think the Dow emphasizes energy?  Technology?  Can you assign some percentages?
3. Here are some questions about how the Dow pricing -
4. 1. If Pfizer goes up by 10%, how much would the Dow increase?
   2. If IBM goes up by 10%, how much would the Dow increase?
   3. If Apple goes up by 10%, how much would the Dow increase?
5. Where would the Dow be if all of the components regained former highs?
6. What is the P/E for the Dow -- trailing and forward?

Your Grade

You can kid yourself, but I already know that your grade is an "F".  I have tested the questions on a number of veteran traders.  They do not know the answers.  If you do, you are among a very select group of readers.  They can only name about 15 Dow stocks and you probably can't get to ten without a mistake. 

Here is an idea for Erin Burnett.  Ask a few of these questions to your next "expert."  It would be an interesting reality check to see if guests had any factual knowledge.

Meanwhile, many investors have a high degree of confidence while completely lacking the most basic information.  This is exactly what I was pointing out in yesterday's article about the Dunning-Kruger effect.  The average investor is touted by TV ads, encouraged to invest because he has a "feel for the market."  No information required.

The advertising firms and the financial media are treating you as if you were a clueless bozo.  The Dunning-Kruger effect operates on self-selection.  You have the opportunity to decide whether to be a bozo, or to open your mind to alternatives.  It is your choice.

A Few Answers

Here are a couple of answers for the pop quiz.  You can look up the Dow stocks here.  My best respondent (an extremely intelligent friend who is a veteran trader) had a good approach.  He thought about drugs, oil companies, consumer stocks, financials, cyclicals, conglomerates, and technology.  He got to about 15 with only one mistake and probably would have reached twenty given more time.  If you could write down ten Dow stocks, you are in an elite group.

This means that most people hold a strong opinion about "the market" without knowing many facts.

The Dow has only two energy stocks, XOM and CVX.  There are several technology representatives but it is all complicated because the Dow is price-weighted.  Here are the 10% move answers:

• If Pfizer goes up by 10% the Dow moves only 11 or 12 points.  You would hardly notice.
• If IBM goes up 10% the Dow moves by almost 100 points.
• If Apple goes up 10% --well, this is a trick question.  Apple is not in the Dow.

Those are the only answers for this article.  I have the other answers, of course, but it is an ongoing research project.

If you do not know the answers, why are you so confident?

Comments

[oldprof]

TDL -- I agree about the Dow. I have good reasons for taking this as my illustration, mostly because it is everyone's shorthand for the market.

It is also true that those who follow the Dow also trade it, so I think my approach has some validity.

I very much appreciate your comment.

Jeff

[oldprof]

Proteus -- I congratulate you! Most people blew through the article in a few minutes, sticking with their pre-conceived ideas. You were willing to think, and perhaps it opened up some new ideas for you.

This was my objective, and I am delighted that it worked for some readers.

Thanks for taking the time to write.

Jeff

[TDL]

I would argue that the Dow is not necessarily the "market" (or even representative of the market) and it might not be necessary to know, or follow, any of the components. If the Dow is not relevant to a specific trader/investor, then knowing the this index would not constitute relevant information. That being said, I like the thought process you are attempting to put readers through. I liked the series of questions you put forward (they gave me something to ponder), as well as Wednesday's article.

Regards,
TDL

[Proteus]

Jeff:
Tough little quiz, and not trivial at all.

For the record, after half an hour, I had 15 right, and four wrong. I got seven more in another four hours, but shame on me for missing two stocks I own, and one my wife owns. Terrible.

A month ago, I checked the P/E on a random selection of half a dozen Dow companies and was shocked at how reasonable they were - HPQ under 14! Then I did the same for half a dozen random companies not in the Dow, and was surprised how much higher they were.

It will be interesting to see more analysis of Dow 20k.