Serials by Kellogg

If the Dow Jones Industrial Average (the DOW) can reach 9,000, then why not 10,000 or even 20,000? Aren’t all things possible when you speculate about the future—the next millennia? Or should it be anticipate? Speculate or anticipate, what’s the difference if you are winning?

It’s always exciting to see stock prices rise to new highs, especially ones we own. But the question is why? Not why we feel good but why new highs? That’s the real question each investor should ask. Why, for instance, should AT&T, old "Ma Bell," double its stock price in less than a year even though pundit after pundit had warned about the company’s inability to capture customers, innovate or even lead itself? Were they wrong or did the market have a mind of its own?

Now the ever-excitable TV commentators on a multitude of financial help shows seem determined to make us celebrate each DOW millennia as if it were some rite of passage. With great fanfare they usher in each new season of record highs. Their warnings are clear: if your stocks didn’t bloom early this season then you may be left behind, left out of the fun. But perhaps you are like us at IFM in anticipating something better, something more lasting than spring flowers.

There is no simple answer—there never is—yet a few facts are in order when looking at record returns from market highs. A 30% market gain becomes a 9% annualized gain if no new highs are made in three years; after five more years, it becomes 3%. Sobering math particularly when you realize it was taken from the crash of 1987 and the plunge of 1974—events beyond the personal memory of most commentators.

Big successes are tough to repeat yet who among us wants to be left out from trying? Too bad the math keeps playing dirty tricks on this speculative side of our greed. It makes us forget to ask how much was by luck or guile or practiced skill. The Beardstown Ladies, for example, captivated us with their homey claim that "you too can make over 20%" in today’s markets. It’s sad that some 800,000 book copies later we learn that they left out basic accounting from their lessons and so could only claim below 10%. Still, their underlying message was not wrong.

The answer we’re seeking lies in the difference between looking strong and becoming strong. It is the essential difference between speculating and anticipating. It takes discipline and time to build lasting performance—real strength. Since investing is the purchase of future economic performance, it requires the discipline of anticipation, not the fleeting excitement of speculation. Ask yourself, do I have the patience to let real value mature? Or which is better: to blossom and wither in one season or to grow stronger and stronger season after season? That is the difference.

Remember, trees don’t grow as fast as flowers but they make better shelter.