Dow 36,000 12,000

In 1999, the journalist James K. Glassman co-authored a book called Dow 36,000. The eponymous prediction did not pan out. A couple of days ago, Glassman popped up in the Wall Street Journal, trying to explain where he went wrong. “The world changed”, explains Glassman. The relative economic standing of the U.S. is declining. Plus terrorists and economic instability made the world a riskier place.

But there’s a better explanation. Glassman’s story never made sense in the first place, for reasons Paul Krugman explained when the book first came out.

Glassman has a substantial history of confusion about how financial markets work. Ten years before he wrote Dow 36,000, he was explaining in The New Republic that stocks are better investments than real estate:

if you bought a $200,000 home in Foggy Bottom [a neighborhood in Washington, D.C.] in 1979, it would have been worth $316,000 [ten years later]. But if you’d bought $200,000 worth of stock in 1979, it would be worth $556,000 [ten years later]—and you’d have another $68,000 in dividend income.

Edit: I’d left a few key words out of this quote; it’s fixed now.

This is a wondrous example because it goes so far beyond being simply wrong all the way to the exact opposite of the truth. Here’s how I exploited that example in my book The Armchair Economist:

Well, yes, but if you’d bought the house you would have had a place to live for those ten years, whereas if you’d bought the stock you’d have been making rental payments to a landlord. This renders Glassman’s comparison meaningless. All he shows is that if you compare some of the benefits of owning stock to some of the benefits of owning real estate, then the stock comes out ahead. Big deal.

Glassman’s … conclusion is exactly the opposite of the truth. He explains that “stocks appreciate faster than real estate; they always have and they always will. The reason is that a share of stock is a piece of a company in which minds are producing value. Real estate just sits there.” The truth is that stocks appreciate faster than houses precisely because a house does not just sit there; it provides shelter, warmth, and closet space every single day that you own it. Stocks need to appreciate faster to compensate for the fact that they don’t provide any comparable stream of services. If stocks and real estate appreciated at the same rate (counting the dividends as part of the appreciation, as Glassman does), nobody would own stocks.

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15 Responses to “Dow 36,000 12,000”


  1. 1 1 Mike H

    I remember reading this example in your book, thanks for reminding me of it again. I was just arguing the “principle of indifference” with someone on a forum – someone who doesn’t like market systems because they ‘produce inequality’. I tried to explain that a perfectly freely operating market does precisely the opposite : it renders all possible things one might do completely equally preferable, unless one happens to have some tastes or talents that deviate from the norm.

    No reply yet, but he probably won’t get it.

  2. 2 2 Bennett Haselton

    I think you mangled the Glassman quote copying and pasting it — the original was:

    “If you bought a $200,000 home in Foggy Bottom [a neighborhood in Washington D.C. in 1979, it would have been worth $316,000 [ten years later]. But if you bought $200,000 worth of stock in 1979, it would be worth $556,000 [ten years later]–and you’d have another $68,000 in dividend income.”

    As you said, that doesn’t make economic sense, but in your copy and paste, you trimmed some words out, so that it no longer makes grammatical sense either.

  3. 3 3 Sean

    So would an accurate comparison be buying a $200,000 house, renting it out for 10 years and placing that rent money in a savings account versus buying $200,000 in stock and placing dividends in a savings account?

  4. 4 4 Mike H

    @Sean – maybe, but not in Australia. It is more worthwhile here for me and my future neighbour to buy two identical houses and rent them out to each other, rather than to each buy our own house and not pay rent.

  5. 5 5 Jamie

    @MikeH How so?

  6. 6 6 Michael in UK

    Excellent post, thank you. However misplaced, that book title still makes me smile. Beatuifully direct and compelling. Wonder if it was the author or someone at the publisher’s? If the latter, she/he earned her salary that month/year.

  7. 7 7 Al V.

    Wasn’t the fundamental problem with “Dow 36,000″ that it was just plain wrong? In the end, the aggregate change in value of all stocks should track to the change in GDP. After all, U.S. stocks represent some portion (because they exclude family owned business and partnerships) of the U.S. economy, so they should track with some level of accuracy to GDP. And of course, the Dow stocks represent a very small portion of the U.S. economy. Thus, the only way that the Dow could increase to 36,000 would be for U.S. GDP to triple, or for the portion of the economy represented by the Dow stocks to triple, or some combination of the two – and neither of those was likely to happen. So, bottom line, the concept was just plain stupid.

  8. 8 8 Nick

    Glassman’s aim was merely to illustrate that in order for the real yields of stocks to be brought down to that of bonds – approximately a third of a percent according to Mehra and Prescott – stocks would need to appreciate fourfold for the equity premium to vanish thenceforward.

    But there’s no reason to expect bonds to carry the same riskiness as stocks (we should expect them to diverge since, i.a., stockholders have subordinated claims on assets in the event of liquidation), and abandoning financial instruments such as bonds in favor of real estate as points of comparison is dangerous for the reasons mentioned above.

  9. 9 9 Will A

    @ Nick:

    “Glassman’s aim was merely to illustrate that in order for the real yields of stocks to be brought down to that of bonds – approximately a third of a percent according to Mehra and Prescott – stocks would need to appreciate fourfold for the equity premium to vanish thenceforward.”

    Is this why he used “The New Strategy for Profiting From the Coming Rise in the Stock Market” in his title?

    Prof. Lansburg:
    In an effort to increase sales, have you considered renaming your books:
    “The Big Questions: Strategies for Getting Filthy Rich in the Face of the Great Recession.”
    or
    “The Arm Chair Economist: Investment Secrets that Wall Street Doesn’t Want you to Know.”

  10. 10 10 Will A

    Also telling about the American Public. I went to Amazon.

    Those who bought “Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market” written in 1999 also bought:
    “Why the Real Estate Boom Will Not Bust – And How You Can Profit from It: How to Build Wealth in Today’s Expanding Real Estate Market” written in 2006.

  11. 11 11 Seth

    “The world changed”, explains Glassman.’

    I thought that’s where Glassman primarily went wrong, he didn’t factor in the possibility that the world does change.

    If I recall, his argument was that the value of stocks should be higher because the world had become a predictable place and the future cash flows from companies were so safe and predictable they should have a much lower discount rate.

    But as it turns out, the world is still unpredictable and the market generally keeps that factored into the discount rate despite what seemingly smart people who manage to get published say.

  12. 12 12 jj

    I ran the numbers: if you buy and rent out the house, and reinvest all rental income into real estate, after 10 years you will have $513000 worth of real estate.

    Assumption is a house P/E ratio of 16, which is on the favorable side for the landlord.

  13. 13 13 Paul

    So, what if we took out all of the living benefits of owning and living in a home by say, just buying to rent it out or maybe investing in real estate through REITs? I would think simply comparing returns between real estate and stocks is not useful because the returns differ in their level of market risk. If stock market returns have greater market risk than real estate returns, why would it be surprising that long-run stock market returns are greater than real estate?

  14. 14 14 Mike H

    @Jamie if I live in my own house, there’s no capital gains tax, but the mortgage interest payments are not tax-deductible. If I rent a house and rent out an identical house at the same time, the rent I pay is not tax deductible, but the rent I collect is taxable, and the mortgage interest payments are tax deductible. Since capital gains are only taxed at half the normal income tax rate (if the asset is held for a year), mortgage interest tends to be greater than rent (at least at first), and I get a nice discount on my income tax each year.

  15. 15 15 Nick

    Glassman’s arguments notwithstanding, one should not be too quick to discount the possibility that stocks are superior to real estate on a risk-adjusted basis. Benefits cited above, such as the intrinsic value of shelter and tax subsidies, are offset by costs such as ongoing maintenance, wealth concentration, high broker commissions relative to securities, and uninsurable idiosyncratic risks like neighborhood deterioration. Moreover, the American dream of home ownership, combined with the absence of a liquid market to arbitrage away such grotesqueries, may facilitate systematic mispricings.

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