DOW 36,000 REVISITED: James Glassman

DOW 36,000 REVISITED: James Glassman and Kevin A. Hassett take an updated look at their 1999 book, Dow 36,000 in The Wall Street Journalin light of the recent gyrations of the market, and find its principles still sound. The whole piece is a very good, especially these paragraphs:

For students of modern finance, the real mystery is how to reconcile these two facts: Over the long term, stocks return much more than bonds, but stocks are no more risky than bonds. This paradox is called the “equity premium puzzle”– the premium being the extra return that stocks provide over benchmark bonds. For decades, economists were at a loss to explain the puzzle. A 1997 paper by Mr. Siegel and Richard Thaler of the University of Chicago concluded that the answer was “myopic risk aversion.” In other words, investors are so frightened of short-term losses in the stock market that they can’t see beyond their noses.

We argued, to the contrary, that investors were finally solving the equity premium puzzle. Starting about 20 years ago, irrational risk aversion to stocks began to decline, thanks mainly to the spread of new research, better financial education, the rise of defined-contribution retirement plans, and increased world stability.