Opinion: Long-term investor yawns at Dow Jones industrial hype

In typical (or stereotypical) Northeast fashion, the interviewee was succinct with his answers to the network reporter’s questions.

“I understand you are wearing the same uniform you had at the end of World War I.”

“Yep.”

“And you march the entire length of the parade every year.”

“Yep.”

“I heard that you have not missed marching in this parade since you came home from the Great War.”

“Yep.”

“Have you lived in this area all your life?”

“Nope, not yet.”

Ah, the magic of words and certain numbers, the fascination in this instance being with the Dow Jones industrial average exceeding its previous high. Most in the media have referred to it as its all-time high, which, to paraphrase the Northeasterner, has not reached its all-time high yet.

But in terms of reaching a “new” high, it is, as I write this, struggling with that objective. And what a focus it is for the media. In terms of significance, it is minimal, but we wouldn’t know it unless we heard from some of the experienced market veterans who put it into the context of previous market milestones.

Dow perspective

So this experienced veteran of 38 years of investment battles will volunteer a few comments. Thirty-eight years ago, when I was laboring as a stockbroker (there aren’t any of those around anymore – they’re all financial consultants or advisers or whatever) a prospective client told me he was not going to buy any stocks and might even sell those that he owned because “the market will never go above 1,000 on the Dow.”

Then there were all those fascinations with other round-number levels on the DJIA; 2,000, 5,000, and (who can forget) the big 10,000, this last one so in the sights of the media that CNBC planned a special program and celebration, and the front page of many newspapers trumpeted the anticipated event.

The performance of an average that consists of only 30 stocks, and that average hitting a large round number or exceeding a previous high is, for the most part, irrelevant. Oh, there’s a modicum of psychology involved, and perhaps an excuse for some of the Wall Street gurus to have an extra martini at lunch, but for the long-term investor it is a yawner – wake me when the horn-tooting is over.

And while that venerable average is, or isn’t, able to penetrate that level, the broader-based index, the Standard and Poor’s 500 sits about 12 percent below its previous peak, and the Nasdaq Composite remains (this is ugly) at 56 percent of its March 2000 high of 5,132.

One of the most repeated comments, especially during periods of market uncertainty, is that, “It’s a market of stocks – not a stock market.” Although I find more humorous than helpful many of the clichés of the street, this one has merit.

Do you own the “market’ or do you own a portfolio of stocks and bonds that represent solid individual companies? If you own the market by having monies in an index fund such as the S&P 500, how is that relevant to the Dow hitting new highs?

Good stocks

OK, we’ve established the fact that all that noise is of little consequence, that there is no real significance to any particular levels, and that individual portfolios of good companies’ stocks are where the emphasis should be. So what are some of those stocks?

Assuming you have a well-diversified portfolio that avoids the “too many eggs in one basket” situation, here are some areas that we suggest a longer-term investor consider for a moderate risk portfolio: oil exploration and service companies (Hercules Offshore, Diamond Offshore, Transocean Inc., XTO Inc., Schlumberger); pharmaceuticals (Johnson and Johnson, Bristol Myers Squibb, Pfizer); and financials (Citigroup, Hartford Financial Services, Bank of America). If your portfolio is not of sufficient size to allow for inclusion of most or all of the issues mentioned, we suggest you consider exchange-trade funds to gain representation in their specific industries.

(In the interest of full disclosure, please note that the issues referenced are, as of this writing, held for many of our clients.)

Clark Davis is a 37-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.