Dow 1,000,000

By Daniel Kadlec

We have a saying in the news business: three's a trend. It works something like this. If one tree falls, it was a bad tree; if two trees fall, well, the grass needed more light anyway. But if a third tree topples, stop the presses. There must be some hideous new insect at work, threatening the entire forest. And that's a story. So it is with a trio of recently published books, and I'm not making these names up: Dow 36,000 by James Glassman and Kevin Hassett, Dow 40,000 by David Elias and Dow 100,000 by Charles Kadlec (no relation). I'm thinking of writing one called Dow Infinity. Top that.

Taken as a trend, these optimistic titles frighten me. They are the product of a stock market that has gone higher, faster, than just about anyone expected. It's natural to project the recent past to the future. But it's also natural for things to change. Long periods of disappointment have followed long periods of heady market gains at least twice this century, in the '30s and the '70s.

Frankly, we're due. And that brings me to another batch of three: The Crash of the Millennium by Ravi Batra, who, as they say, has called five out of the past two recessions; Beat the Millennium Crash by Jake Bernstein; and Devil Take the Hindmost: A History of Financial Speculation (Dutch tulip bulbs to junk bonds) by Edward Chancellor. The bubble theories in these books at the very least provide some counterweight to the sky's-the-limit authors.

Books about the market's direction are pure guesswork. Elias and that other Kadlec as much as admit that there's nothing special in their forecasts. Elias predicts Dow 40,000 by 2016, an average annual gain of 9%. Kadlec projects Dow 100,000 by 2020, equal to 11% a year. Given that stocks have returned 17% a year over the past 20 years, it's hard even to call them bulls. About all they're saying is that the U.S. will remain a sovereign nation. I'd call that a real sturdy limb they've climbed onto. By now, just about everyone knows that stocks go up 10% annually, on average, give or take, over long periods, even though they often fall sharply over short periods.

Glassman and Hassett are a different breed. They predict that the Dow will go to 36,000 in short order, gaining something like 35% a year for the next four years. Now there's a thin bough. They believe investors are revaluing stocks to a permanently higher plateau. It's a fun argument but boils down to familiar ground: diversified portfolios are superior and safe if held for long periods. A growing awareness of that idea is bringing more investors into the market at ever higher prices, inflating the average stock's price-to-earnings multiple from 10 to 30, and, the authors assert, soon to 100.

Yet if stocks remain risky in the short term, as the authors concede, then stocks remain risky, period. Few people can be certain that no life event will force them to tap long-term savings early. The inescapable risk of stocks is that when you need the money, they may be down. That risk shouldn't keep you from buying stock for the long run, stuffing your 401(k) each pay period and sitting tight when the market turns choppy or goes flat for years. But here's my prediction, and you don't even have to buy my book: short-term risk will become more apparent in coming years, keeping a lot of money out of the market and the Dow below 36,000 long after this year's freshman class joins the work force.

See time.com/personal for more on long-term investing, and see Dan on CNNfn Tuesdays at 12:45 p.m. E.T.