By Pat Regnier

(MONEY Magazine) – Perhaps we should be satisfied by now. In the most phenomenal extended bull market in U.S. history, any investor who merely owned an S&P 500 index fund over the past five years has seen his or her account more than triple in size. Of course, many of us did not own such a fund. And as the market continues to gyrate, it seems increasingly possible that the end of the fun may be near. If you haven't already bought in, you may be wondering if it's too late now. If you have been in the game, you probably can't help but ponder if it's time to get out while the getting is still pretty good.

But if you're looking for reassurance, it's easy to find. At the end of this prosperous decade, proclaiming the good news of stock market gain has become something of a cottage industry for a handful of super bulls. At the relatively cautious end of the spectrum, there's Wharton professor Jeremy Siegel, whose 1994 book Stocks for the Long Run has become a new bible for long-term investors. The book is now in its second edition, and Siegel has developed a lucrative career as a public speaker in the hire of a mutual fund company that pays him more than $10,000 a speech. On the radical side, journalist James Glassman and former Federal Reserve economist Kevin Hassett have been making headlines with a new book, Dow 36,000, that says the market is poised to more than triple in value. And then there's Harry Dent, the incomparable author of the business bestseller The Roaring 2000s and its new sequel The Roaring 2000s Investor. Dent, who charges $40,000 a speech and even has a new mutual fund named after him, has turned himself into a virtual brand by predicting that the market will rise for another decade--until the Dow Jones industrial average, around 10,000 today, peaks at 41,000.

The messages of these optimists are certainly appealing, and they have a better record than the bearish pundits who have complained for years that by traditional measures the stock market is overpriced. But do Siegel, Glassman and Hassett, and Dent really have the tools to predict what's going to happen over the next year, the next decade or even further?


You might call Jeremy Siegel, a professor of finance at Wharton, the intellectual father of this bull market. The late 1990s rally has been a much more democratic affair than those of the 1960s and the 1980s; about half of American adults are invested in the stock market today, up from a fifth a decade ago. There are lots of reasons: the rise of 401(k)s, the glamour of Internet stocks and the boom in mutual funds and discount brokerages, to name a few. But perhaps most important is that investors now take it as an article of faith, contrary to the conventional wisdom of just 20 years ago, that stocks are a safe investment for the long term. Directly or indirectly, they learned that from Siegel and his seminal 300-page book.

In Stocks for the Long Run, he showed that over most long periods of time--especially any holding period longer than 10 years--stocks have offered higher returns than bonds. This argument wasn't completely new: Roger Ibbotson at Yale had already convinced institutional investors that stocks had been a consistently good investment since 1926--even the great crash of '29 doesn't look so bad when it's buried within a 30-year average. But with a little creative archival work, Siegel was able to stretch the numbers back to 1802.

More important, Siegel wasn't afraid to use his numbers to draw dramatic conclusions and give simple advice. He showed that the notorious Nifty Fifty stocks--a group of well-known big-cap stocks like Coca-Cola and McDonald's that got crushed by the '70s bear market--were good investments if you hung on to them long enough. He suggested that bonds, if you accounted for inflation, were actually riskier than stocks in the long pull. And he recommended that even conservative investors stash 71% of their long-term (30 years or more) money in the stock market and that aggressive types should borrow to get 131% exposure.

The book soon found an eager audience among financial planners, who were able to use Siegel's numbers to talk nervous clients into stocks. (Planners sometimes mail Siegel boxes full of copies of Stocks for the Long Run for him to autograph. He says he always obliges.) Siegel also became a staple source for financial journalists, at MONEY and just about everywhere else, who wanted to make the same point.

Some of Siegel's biggest fans, however, are executives at financial services firms. Not long after Stocks for the Long Run came out, he was invited to speak at a Dean Witter equity conference. He guesses he's done more than 200 such speeches since, all the while maintaining a full teaching load. Recently, he became "senior adviser for investor strategies" for the Chicago-based fund company Nuveen, which means he's on retainer to speak to their shareholders and the brokers who sell their funds. He makes more from speaking these days than he does from teaching.

Siegel's speeches, like his book, focus on the importance of staying in stocks. "Having a Wharton professor say this works better for our clients," says John Waterman, managing director of investments at Rittenhouse, the subsidiary of Nuveen that runs stock funds. This message has helped make a lot of ordinary investors quite rich over the past five years. But is it still the right message today?

Broadly speaking, the answer is probably yes. Still, Siegel's data don't quite add up to an ironclad rule that stocks are always a great buy. The data on stocks in the early 19th century are sketchy; the indexes Siegel uses track mostly banks and, later, transportation companies. Siegel argues that these companies make up the best possible proxy for corporate America in those days, but there were countless other companies--ranging from turnpikes to land developers to taverns--sporadically selling equity to investors, and there are no good data to account for their performance. In other words, Siegel may be overstating the success of 19th-century stocks by tracking only the best companies.

And even if you could track stocks as far back as the rule of King Ethelred the Unready, it wouldn't prove a thing about what they will do in the future. There simply are no guarantees, especially now that everyone "knows"--thanks in part to Siegel--that stocks beat bonds. As a result, stocks are a lot more popular than they used to be, which means they are also much more expensive--at least as measured by the price-to-earnings ratio. So there may be less room for them to rise.

In fact, that's essentially the argument Siegel himself makes in a new paper to be published this fall in the Journal of Portfolio Management, the most prestigious journal of academic finance. "The divergence between increased historical returns and lower future returns could set the stage for some significant investor disappointment," he notes dryly in his draft. In other words, the party may be over.

This message is certainly less optimistic than the ones Siegel delivers in Stocks for the Long Run and in the speeches he gives for Nuveen. "People have said to me, 'In professional circles you seem more cautious than you do when you're addressing investors,'" Siegel admits. "The major reason for that is I don't want to give investors the idea that I'm saying stocks are a bad buy now." What is he saying, then? Siegel hastens to point out that he is not predicting a crash; he's just suggesting that the market may be relatively flat in the long term. He also thinks that stocks still look better than bonds, which he says are not likely to return more than 4% after inflation in the coming years.

To Siegel's credit, he has long urged investors to have "reasonable" expectations for stock returns. He has been telling audiences to expect 5% to 8% inflation-adjusted average returns from stocks in the long run. That's a far cry from the double-digit gains we've gotten used to. And it's almost bearish compared with the predictions others have made using Siegel's data.


No one could have predicted that Jim Glassman would come to be viewed by many as a member of the bull market's lunatic fringe. He is far more business-savvy than your average journalist. He's had to meet payrolls as a publisher of The New Republic and co-owner of Roll Call, the highly regarded newspaper that covers Capitol Hill. Until recently, he was a financial and op-ed columnist at the Washington Post. (In a 1997 column, Glassman called MONEY "dumb" for printing a cover story urging investors to sell stock.) He's now a fellow at the American Enterprise Institute (AEI), an influential conservative think tank in Washington. Nevertheless, he and his AEI colleague Kevin Hassett have taken Siegel's work and pushed it to its theoretical extreme. They are utterly convinced that the great bull market ride has only just begun.

Glassman and Hassett believe that we need to rethink the traditional measure of whether a stock is fairly priced, the ratio of a company's stock price to its earnings. While Siegel frets that the S&P 500 may be expensive at 28 times earnings (14 is the historic average for stocks since 1871), Glassman and Hassett have used his data to argue that stocks are really worth as much as 100 times earnings. And they're not just talking about, by the way, but Gillette and General Electric and Coca-Cola. Even Siegel has said publicly that his research simply does not support this theory, but Glassman and Hassett are undaunted. "Sometimes the people who come up with new data are most resistant to its implications," says Glassman.

Glassman and Hassett say they began plotting their revolution during casual chats in the corridors of the AEI. The conversation eventually turned to what financial academicians call the equity premium puzzle. In a nutshell: If stocks really are safer than bonds over long holding periods, as Siegel's numbers show, then why don't they cost at least as much as bonds? In other words, investors should have to pay a comparable price to get comparable peace of mind. Glassman and Hassett believe that as investors wake up to this fact over the next five years or so, stocks will become "fairly" priced--putting the Dow at 36,000.

Those are shocking numbers, and they immediately stirred controversy. When the Dow topped 10,000 in March, the Wall Street Journal published a short version of their argument on its op-ed page; Siegel promptly wrote a letter protesting that he believed investors might already be expecting too much from stocks. On the Slate website, Clive Crook of The Economist accused Glassman and Hassett of getting their math wrong. "I have been disappointed at times," says Hassett, who has a Ph.D. in economics, "by the lack of civility of some." In their book, Glassman and Hassett walk through the math in numbing detail, and if they are making a mistake it's not nearly as simple an error as some critics suggest. But there are other sticky points in the Dow 36,000 theory.

For one thing, the equity premium puzzle isn't so puzzling if you think about your own behavior as an investor. Even if you plan to hold, say, an S&P 500 index fund for 30 years, you'd probably get upset if the fund lost 25% over the next two years. That kind of loss can be terrifying--even with Siegel's assurances that things will be okay if you just ride it out. And that helps explain why, in the history of stock markets, investors have never been willing to pay as much for stocks as they do for bonds. People just hate to lose money, and they're not good at looking out 30 years. The University of Chicago's Richard Thaler, a pioneer in the field of behavioral finance, calls this overreaction to short-term volatility "myopic loss aversion," and says it's a basic psychological trait of most investors. ("Thaler is valuable," says Hassett, "but people learn.")

And think about this: What might the world look like if investors had so much confidence in stocks that they would routinely pay 100 times earnings? The capital markets could become a free money machine for businesses, as some critics have pointed out, meaning your local dry cleaner and favorite corner pub might start issuing stock. Because they are much more likely to go out of business than, say, Philip Morris, these companies would make the stock market a much more volatile, speculative investment than it's been the past 200 years. It's arguably happening right now, as Internet companies with no earnings command stratospheric stock prices.

Doesn't this make the market riskier? "The notion that the risk characteristics of the market might change is a neat and interesting thought," concedes Hassett. But neither he nor Glassman think that such a dramatic rush to go public, if it happened, would torpedo either the market or their theory. "The value of equities owned by U.S. households has grown from $2 trillion 10 years ago, to $11 trillion today, without untoward consequences," Glassman says. "But this is a worthwhile point. As the Dow rises, investors must become more choosy." In fact, Glassman and Hassett devote the second half of their book to outlining a particularly choosy, even conservative, investment strategy. Among their favorite stocks is Tootsie Roll Industries, which trades at a relatively modest 18 times its expected 2000 earnings.

Despite the chilly reception the Dow 36,000 theory has received, it's not going away--at least not so long as the bull market continues. Glassman and Hassett have found defenders, if not exactly true believers, within the financial services industry. Recently retired Vanguard Funds chairman Jack Bogle devotes an appendix in his latest book to questioning Glassman and Hassett's calculations, yet he also gave a carefully worded endorsement for the back of their book: "Dow 36,000 offers superb advice." Another blurber, David Malpass, chief international strategist for the brokerage firm Bear Stearns, told MONEY: "I don't particularly want to defend the 36,000 [projection]. I want to defend the idea that new thinking on valuation is important and timely." Perhaps when none of the old rules seem to apply, even fringe ideas begin to sound respectable.


The amazing thing about Harry Dent is that the idea that launched his success is so tiny. He believes that the economy, and therefore the stock market, can be predicted based solely on demographics. If there are a lot of people in the high-spending stage of their lives--such as today's baby boomers--the economy and the stock market go up. If not, they go down. And that's it.

From that idea has grown a one-man empire that Dent runs from his home office high in the Oakland Hills, where he enjoys a stunning view of the San Francisco Bay. His speaking schedule makes Siegel's look like a mere hobby; one day last summer, he says, he gave five talks to groups of individual investors and brokers. Houston's AIM Funds recently launched the Dent Demographic Trends fund (now $305 million and growing by about $5 million a day). Dent doesn't actually run the fund--he simply sends faxes with broad sector picks to lead manager Lanny Sachnowitz--but he pockets a portion of the fund's management fees (he won't say how much).

Dent claims to prove his demographics-are-everything theory with the "Spending Wave" chart on page 114. The chart shows that the Dow, after being adjusted for inflation, seems to move in step with the number of 46 1/2-year-olds in America. Age 46, Dent asserts, is when people spend the most, and the ranks of 46-year-olds are still swelling.

Dent believes this model proves that the market will keep going up--and also shows when it will turn down. He thinks all this talk from Siegel, Glassman and Hassett about stocks being a safe investment over the long run is nuts. He starts most of his speeches by showing how dangerous it can be to be in stocks at the wrong time. "What if you had been in the stock market from 1929 to 1942?" he asks. "That's 13 years of a bear market. Or '68 to '82? A 14-year bear market." According to Dent, stocks will be great until 2008, when the number of 46-year-olds peaks; after that, he says, you'll want to own real estate and bonds: "You have to fit your investment strategy and portfolio to the season."

Dent's reputation as a seer was established by his 1993 tome, The Great Boom Ahead. In it, he predicted that the end of the biting recession was at hand and that the '90s would be a decade of unprecedented economic prosperity. One good macroeconomic call like that can be all it takes to make a guru's career. "I didn't think of it this way," says Dent. "But that's what you have to do in economics--you have to make some bold predictions."

The problem with Dent as a market sage is that he may be confusing description and prediction. Spending by baby boomers is vital to the economy, and it sure does seem likely that they'll spend more over the next decade. But we already know this, and it's part of the reason we've been willing to pay such high price-to-earnings ratios for companies like Starbucks, Microsoft, Citigroup and Dell. Just as investors drive up prices as soon as it becomes clear that stocks are historically "safe," so too do they drive up prices when it's clear that the economy is prosperous. Many market experts believe that this good news is already reflected in stock prices. (And on the flip side, the news that people will spend less after 2008 may also find its way into stock prices as that date gets nearer--so you could be in trouble if you wait until then to move into bonds.)

Dent doesn't ignore the valuation issue completely. "The last two years, it's been...the biggest issue," says Dent. "And how I finally addressed it, and the best way I can see it for now, was to put the stock market in a channel." Dent relies on a simple but unorthodox market-timing tool called the Dow Channel. In essence, he takes the average performance of the Dow since the early '80s, when the population of 46-year-olds began its rise, and projects it out to the year 2008. That's how he gets his bold Dow 41,000 projection.

The Dow Channel also helps Dent explain the seemingly paradoxical fact that he has grown more bullish as stocks have gotten more expensive. When Dent first predicted the Great Boom in 1993, he used his Spending Wave model to predict that the Dow would rise to about 8,500 by 2007. When the Dow passed that number almost a decade ahead of schedule, Dent didn't simply declare the market fully valued. "As the market started surprising us," he explains, "I had to go back and look at my assumptions. I don't think the market is stupid." So in his 1998 book, The Roaring 2000s, Dent adjusted his population data to account for immigration and added a Dow Channel projection to predict that the Dow would peak between 21,500 and 35,000 in 2008. Dent's latest book pushes his projection to 41,000.

Asked if he might not be too, well, flexible with his numbers, Dent is unapologetic. All that really matters, he insists, is that his Spending Wave indicates the general direction of the market. "The real truth," he says, "is that over time, as long as the economy is growing, the market is going to go up an average of 16% a year with 20% volatility on either side." Why? Because, Dent says, that's what it's been doing.


So what are you, a solid citizen just trying to fund a 401(k) plan or save for your kid's overpriced college tuition, supposed to make of all of this? Though the ideas of Siegel, Dent, Glassman and Hassett all have their weak points and inconsistencies, the fact is that it's not hard to paint a rosy picture for stock investors. Inflation is still low and economic productivity is high. The economy is going global, and tech-savvy U.S. corporations are leading the way. Innovative new business models have made the economy more efficient and business cycles less volatile. Few warning lights are going off. What better vehicle could an investor choose right now than stocks?

On the other hand, our sense of safety, our confidence that things are going to go well, just makes disappointment more likely. Harry Dent and Jeremy Siegel don't really agree on much, but they both joked in interviews that as soon as everyone understood what they were saying in their books, the market would become overvalued and eventually topple. You could argue, of course, that everyone already knows stocks have been safe historically and that baby boomers are a powerful economic force. These observations may have been fresh once, but now they seem pretty obvious, even banal--and they may already be priced into the market. Or is it possible that Glassman and Hassett are right, and there are still investors who have yet to learn what a great deal stocks have been?

The only thing that's certain is that after five years of almost uninterrupted prosperity, we're in uncharted territory now. The future isn't bullish, and it isn't bearish. The future is a secret. Perhaps the best advice is: Don't be too sure of anything.