Divorcing the Dow: Using Revolutionary Market Indicators to Profit from the Stealth Boom Ahead

273 Pages·2003·11.28 MB·English

by  Jim Troup

DIVORCING
THE DOW
Using Revolutionary Market
Indicators to Profit from the
Stealth Boom Ahead
JIM TROUP and SHARON MICHALSKY
JOHN WILEY & SONS, INC.
To Sandy Lapham and Moses Dillard
Copyright © 2003 by James Troup and Sharon Michalsky. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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ISBN 0-471-26870-4
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10 9 8 7 6 5 4 3 2 1
CONTENTS
ACKNOWLEDGMENTS v
INTRODUCTION vii
PART ONE: HOW THE TIMES THAT WERE A-CHANGIN’ ...
FINALLY CHANGED 1
CHAPTER 1 Breaking Up Is Hard to Do 3
CHAPTER 2 The Financial Frontier 27
CHAPTER 3 911 55
PART TWO: HISTORICAL PERSPECTIVE 77
CHAPTER 4 The Necessary Revolution 79
CHAPTER 5 A Parallel Universe 105
PART THREE: RECONSTRUCTION 129
CHAPTER 6 Artificial Intelligence 131
CHAPTER 7 New Logic 155
CHAPTER 8 We Will Be Able to Say,
“We Were There at the Beginning” 199
iii
iv CONTENTS
APPENDIX A Bonds 225
APPENDIX B Appreciating the Potential of the Emerging Markets 229
APPENDIX C An Alternative to Index Funds 233
APPENDIX D Professionally Managed Portfolios 235
APPENDIX E The Impending Pension Plan Crises 238
APPENDIX F Estimating the Length of the Twenty-First Century Formulation
and Acceleration Phases 251
APPENDIX G Reading List 253
INDEX 257
ACKNOWLEDGMENTS
When a book project takes as long as it does for an eighth grader to fin-
ish high school and most of college, its authors find themselves need-
ing as much support and encouragement as any determined but anx-
ious young adult. Merely thanking those who provided it falls far short
of what we owe them, but we hope they recognize the deeply felt sin-
cerity with which it is offered.
Weare grateful to the sisters, brothers, nieces, and nephews of our
large family who we never had time to see very much but who we al-
ways knew would be there if we needed them. We especially thank our
children and grandchildren, Debbie and Glen and Josh and Brittany,
who offered their insights and tolerated skipping family festivities and
holidays so that we could complete this effort.
This project would never have blossomed without the vision of
Jane Wesman and Lori Ames, who believed in its ideas and helped us
to convey them in ways people could understand. Without their help
we would not have met our friend and agent, the sage and insightful
Helen Rees. Without Helen we would not have known our editor,
Jeanne Glasser, who understood the magnitude of the financial sea
change around us and took charge of making this book a success. We
remain deeply indebted to these four people.
Special appreciation goes out to the chief executive officers of the
vibrant companies discussed in this book: Les Muma, David Halbert,
Richard Haddrill, Jim Sinegal, Ed Labry, Jim Madden, and Jack Lon-
don. They generously lent their time and expertise in helping us un-
derstand the new business culture. We hope that this book reflects
some of the extraordinary vision and know-how that characterize each
one of these leaders.
For doing the tough job of getting it all down on paper—first one
way and then over and over again—we thank Barbara Mosley. She
v
vi ACKNOWLEDGMENTS
was always there when we needed her, day or night, weekend or holi-
day.
The endless task of organizing, reorganizing, and assembling data
and information could not have been accomplished without our loyal
associate Barbara Kaiser and the help of Michelle Todora. Their hard
work and positive attitude sustained us throughout this project. Beth
Morse’s sharp eye and keen suggestions helped to ensure the accuracy
of the material.
Toour colleagues, Mike Marciniak and Bill James, we are indebted
for their insights and expertise and for their belief in us.
Thanks go out to all of our friends who amiably tolerated broken
engagements and our generally being out of touch. Your being there
meant more than you can know.
Finally, this book would not exist if not for our clients. While we
cannot acknowledge you by name, we are grateful for your forbearance
in tough times and your balance during the great times. Your inquiries
and perceptions have helped to form this book.
INTRODUCTION
The future can be annoying.
In 1997, when we actually started putting words on paper that
would become this book, there was really no reason why anyone should
ever want to read them. Investors had dodged a bullet.
In 1994 nearly every investment guru who was being quoted in the
media said that the U.S. stock market was over. It was supposed to be
going into at least a decade-long decline. Gold, international stocks,
and treasury bills were supposed to have been the only places any sane
person would put his or her money. What actually transpired made
those dire prognostications look cartoonishly foolish.
Anew era of prosperity for the American economy began in 1995,
and every sector of the stock market posted stellar returns. By 1997
there was universal confidence in U.S. equities, and the advance was
in full swing. But although this turn of events delighted us as inves-
tors, it troubled us deeply as investment consultants. For the invest-
ment community to have been so wrong about the direction ofthe finan-
cial markets in 1994 meant that the traditional methods used to assess
them must be fundamentally flawed. Our concern was that if this flaw
were not uncovered, we would not be prepared for other significant in-
evitabilities affecting our clients and our own personal wealth. So
westarted the research project that grew into this book. We were as-
tounded by what we found.
Weknew from the beginning that we would have to do more than
revisit the customary lines of reasoning if we were to spot weaknesses
in the existing order. It would be necessary to amass copious amounts
of cultural, economic, and social information, as well as financial data,
and then organize it in a kind of “mapping the investment genome”
fashion. We picked the prosperous twelfth century as a starting point.
This was when the great cathedrals of Canterbury (1175) and
Chartres (1194) were built and the Universities of Paris, Oxford, and
vii
viii INTRODUCTION
Bologna were founded. How the thriving economy fueled European ex-
pansion is an exciting story unto itself.
We moved forward century by century and picked up a thread in
the 1800s that appeared to be tied to the present. Cultural parallels
materialized, and then economic ones. The action of the financial mar-
kets felt uncannily familiar. The more facts we pulled out, the more the
conventional explanations for today’s market behavior unraveled.
When the facts reassembled themselves, they had carved out a pattern
that leaves the investment culture ahead of us looking very different
from the one we just left behind.
That is why the future can be so annoying. Investors had become ab-
sorbed in a process that had worked for a long time. There were reliable
formulations, sacrosanct arrangements, and taboos that defined the in-
vestment system. Now everything is forced to mean something different.
But even though moving into a new investment culture is annoy-
ing, it is annoying like moving into a newly constructed home—a lot of
trouble and a lot of new things to figure out, but well worth the effort.
The new investment culture is more efficient, is user-friendly, and, yes,
has more wealth-creating potential than anything that has come be-
fore it. With the help of our clients and a combined 40 years in the in-
vestment industry, we have attempted to explain its evolution in a way
that everyone can understand.
Compacting all of the information we had accumulated into some-
thing readable was a fairly arduous and time-consuming process. As a
result, the first chapters, set down in 2000 and 2001, have more age on
them than do the last chapters. We decided to update them only slightly
prior to submitting the final manuscript at the end of July 2002. We re-
tained sentences such as the following from Chapter 2, written in Au-
gust 2001, which discusses potential difficulties arising out of the weak-
ening of the old investment culture: “This economic contraction will fur-
ther stress an already deteriorating old dominant investment system,
making it likely that we will see a major disruption of at least one or
two companies—like what occurred with U.S. Steel a century earlier.”
That was written prior to the bankruptcy of K-Mart, the Enron
scandal, and the collapse of Worldcom; it is not meant to show that the
authors have any powers of prediction, but rather to illustrate that in
studying the process by which another investment culture deterio-
rated, we can be guided through our own transition process today.
This project was not about organizing the future. That is, of course,
impossible and unnecessary. The important work is of a more signifi-
cant nature. It is to create an understanding of, and an appreciation for,
the new investment culture. The mission is to open everyone’s eyes to
what many have felt but few have seen and to create a language for
what is often sensed but not defined. This is a very real and important
thing that is happening. We hope we have done it some small justice.
The attitude ... beginning in the high places, among men and women of pres-
tige and authority, trickles down, trickles down, with its formulations, to the
masses. Now this, now that individual is deflected in their direction. Soon a
group has formed definable by the attitude. Then the attitude generates habits.
The habits ... integrate into a common way of life which is now the custom of
the group. A tradition grows up centering on the custom and accounting for it.
Both become sacrosanct and are hedged about with reverence and taboos; op-
position becomes criminal and variation blasphemous. It is the established or-
der now.... Yet with alternatives pressing always on the verge.
—Horace M. Kallen, The Philosophy of William James