Money & Financial News

The DJIA hit that magic 13,000 today and there’s excitement in the air after attaining such a milestone.  People love round numbers.  Remember Apple $500 last week?  Remember Dow 10,000 hats?  Remember the new millennium Y2K?  Remember turning 50?  Round numbers make us want to celebrate – we’ve “achieved” something!  But does it really matter or is it just another random number?  Intellectually, we’d have to argue that round numbers are just like every other number and have no special significance.  But the growing field of behavioral finance makes it clear that round numbers may be important – if for no other reason than because we expect them to be.
 
The Nature of Milestones

It was 1954 when Roger Bannister, the English runner, broke the 4-minute mile record.  It was a big deal and people began to extrapolate what might be possible on the track.  Prior to his record-breaking race, of course, the record was slowly coming down from 4:08 to 4:06 and so on.  The sub 4 minute mile didn’t just happen overnight. Was the improvement from 4:02 to 3:59 any more important than from 4:10 to 4:07?  In some ways no, but it set a new standard and created an optimism that only round numbers can do. Since 1954, high-schoolers have run sub-4 minute miles and the world record today is 3:43.   

On March 29, 1999 the DJIA closed above 10,000 for the first time ever. All the traders on the NYSE (and elsewhere) pulled out their freshly embroidered caps with “Dow 10,000” on them and the confetti dropped to make it a party. The feeling of euphoria that hitting such a milestone created was remarkable. Why, it was just October 1982 when the DJIA was only 1,000. Imagine what was possible!  Since the DJIA first hit 10,000 in 1999, it has revisited that round number no less than 17 times from 1999 to 2010. 10,000 is no big deal anymore. You can get a tired Dow 10,000 hat on Ebay for less than $5. 

There are thousands of examples of round numbers and the celebrations surrounding them. Humans seem to be hardwired to need them – it gives us something to anchor to. Reaching positive milestones gives us all satisfaction and typically a short burst of optimism that even more is possible. This creates a positive feedback loop suggesting that the optimism that comes from reaching milestones actually is warranted. Behavioral finance is its own field in business schools; they study the psychology of investing and often times the errors that investors make as a result of their erroneous thinking. The point is that psychology is clearly as much a part of investing as fundamental analysis.

It may be true that hitting milestones makes no difference fundamentally, but it is also clear that it improves investors’ optimism and behavior. If a market goes up because of fundamentals or because of psychology, do we really care? The rally is real either way.     

Dow 14,000…15,000…100,000?

So we hit Dow 13,000 today and we’re feeling optimistic. Do you dare to extrapolate to Dow 14,000? How about Dow 15,000? I’ll go one further. I’ll extrapolate Dow 100,000 in my lifetime! It sounds crazy, right?  It might be, but let’s see if the math works. Let’s agree on a couple of assumptions. Long term returns on the DJIA since 1930 have been about 6.3% (plus dividends). The DJIA was about 100 in 1932 (really) and is 13,000 in 2012, today. Let’s make a wild guess and agree that the DJIA can continue to grow at an average 6% compounded annual growth rate. I think that’s, arguably, a fair assumption. So, if I’m 50 this year (oh great, a nice round number), the DJIA will hit 100,000 in just 34.2 years or April 2046 when I turn 84 years old. Oh goodie. I just killed my Dow 13,000 round number buzz.    

Ryan Investment Management (RIM) is an SEC-registered investment advisory firm based in Aspen, Colorado serving individual investors and non-profits. RIM manages portfolios using an Active Allocation strategy, combining low-cost index funds and ETFs with a disciplined trend-following approach, to provide investors the growth they desire and the protection they need. More information is available at www.ryaninvest.com or (970) 429-1100.