http://moneycentral.msn.com/articles/invest/inter/4750.asp

Link

Posted 10/7/99

Harry S. Dent -- Market guru

Highlighted Companies

1 yr. vs. S&P Oracle PeopleSoft SAP Baan J. D. Edwards Xoma Cephalon Chase Manhattan J. P. Morgan Charles Schwab Merrill Lynch Morgan Stanley Dean Witter E*Trade

Sponsored Link

See "The Roaring 2000s Investor: Strategies for the Life You Want." by Harry Dent at Barnes and Noble. Interviews Forecaster sees Dow 41,000 in the next decade Author and economic optimist Harry S. Dent believes the best investing opportunities for the new millennium lie in technology, finance and health care. By Eneida Guzman

He's been called "America's favorite optimist," so if you've been hearing too much for your taste lately about the market being "overbought," Harry S. Dent is your man.

While he has experience as a money manager and investment newsletter editor, Dent is most famous as a prognosticator. His 1992 book, "The Great Boom Ahead," accurately foreshadowed the subsequent economic boom and skyrocketing stock prices, though he underestimated the strength of the stock run-up. (He predicted a Dow peaking at about 8,500 in 2000.) That was followed in 1998 by "The Roaring 2000s: Building the Wealth and Lifestyle You Desire in the Greatest Boom in History." His latest effort, out this month, expands on the theme: "The Roaring 2000s Investor: Strategies for the Life You Want."

A big-picture guy, Dent, 46, relies heavily on global demographic and technology trends in forecasting a continued stock-market boom that could take the Dow as high as 41,000 in the first decade of the new millennium. We reached him at his office in Oakland, Calif., to find out how he thinks investors can capitalize on the trend best, and how they can survive what comes next.

How did you go from a nice, respectable pursuit like money management into the business of predicting our future? I began my career in strategic planning and business forecasting for Fortune 100 companies with Bain and Co. in Boston in the late 1970s. I then worked for a decade in strategic planning and turnaround management with entrepreneurial growth companies. I learned that I could forecast the most important trends in any industry years and decades in advance. Therefore, I started testing and refining the same proven forecasting tools for macroeconomic trends. I published my first book, "Our Power to Predict" in 1989 in which I first forecast a Dow of 10,000, a two-year slowdown in the U.S. and the collapse of Japan's bubble. But I began to become a more-noted forecaster after "The Great Boom Ahead" received more mainstream notice. It was only after being successful in forecasting macroeconomic trends for many years that I began to become involved in money management in 1999.

In January of 1999, I was contracted to manage the Heritage Capital Fund, a private fund for super-accredited investors. In March of 1999, Van Kampen launched The Roaring 2000s Trust, a unit investment trust for which I determine the sectors and they pick the stocks. In June 1999, AIM funds introduced the AIM Dent Demographic Trends Fund, wherein I select the sectors and they pick the stocks.

What kind of a track record have you had as a money manager, and how does it stack up to your performance as a prognosticator? Since January of this year, the private fund at Heritage Capital is up about 50% vs. the S&P at about 8%. The Roaring 2000s Trust has a new trust rollout every three months, so the track records are all different. But they have tracked the S&P pretty closely. The AIM Dent Demographics Trend fund since June is up 11% vs. the S&P up about 1%. Therefore, the track record of my approach has been very strong, but on too short a time frame to make strong judgments. But by being in the best sectors favored by strong fundamental demographic trends, I feel confident that I can systematically beat the S&P 500 with reasonable risk levels.

The boom ahead Your 1992 book, "The Great Boom Ahead," went a long way toward establishing your reputation as an optimist. Tell us a little more about that. In 1992, we said the economy was going to boom, the stock market was going to soar, inflation and interest rates were going to fall to near zero and the government was going to balance its budget by 1998. Now in 1992, we were still slowly coming out of a difficult recession, so our predictions were pretty radical. Basically, we've been refining those forecasts ever since.

Granted that you were mostly right on that one. What's turned out to be the worst prediction you've made? In 1989, in "Our Power to Predict," I predicted the recession in the U.S. and the more-severe downturn in Japan. But I thought that the deflationary downturn and bursting of the bubble in Japan would have much more severe short-term repercussions in the U.S. I saw the U.S. stock market declining as much as 40%. The actual decline was only 20%. That was pretty far off the mark and taught me to stick to what the fundamental demographic trends suggested and not to bring international and political factors too strongly into the equation. Hence, when the Asian crisis hit in 1998, I was much wiser and saw little impact on the U.S. economy. Other than that, my biggest error has been underestimating the U.S. stock market on the upside despite being the most bullish forecaster.

What are you forecasting for the first decade of the year 2000? We forecast that the market will go as high as Dow 35,000-41,000 by the top of the boom.

How can investors make the most of the situation? Everybody thinks you're suppose to go buy an S&P 500 index fund now, which is a good investment strategy, but not a great one. We've found that the baby boomers moving into their 40s and 50s are going to leverage technology tremendously; this revolution is just accelerating. Financial services products are going to continue to soar, and so is health care. If you invest in these sectors and in some of the best regions of the world like Asia, excluding Japan, we've shown you can get superior returns with reasonable risk.

Everybody thinks you're suppose to go buy an S&P 500 index fund now, which is a good investment strategy, but not a great one. You advise investors to get there without using a traditional asset allocation model. Why? What we do in this new book is attack the model in this industry that says you should be in large caps, small caps, international, fixed income. That is a disastrous strategy. It has underperformed the S&P 500 by 6.5% a year, on average, over the last decade. The truth is it's a good, all-weather strategy if you're going to hold a particular portfolio forever. But nobody does that. We look at the seasons of our economy that are generated by demographic cycles, by new generations. And we're in a season that favors large-cap growth stocks. That will continue.

A vote for Asia Why do you favor Asia? The demographics in Asia are strong. We say, instead of being in mediocre segments like bonds or small caps, or bad parts of the international markets, be in the strong sectors that diversify well -- sectors that are backed by very powerful, demographic trends. We know the baby boomers are going to buy more investment products. This isn't even a question. We know they're going to use more health care as they age. We know they're going to buy more technology. And we know Asia has the strongest demographics in the world in the coming decade -- Korea, Singapore, Hong Kong and countries like that. Japan does not.

Japan has been on an upswing lately. And it's one of the largest economies in the world. Why exclude it? We think that's a short-term trend. We think the partial recovery is a combination of a lot of government finagling and stimulus. Obviously, Japan has strong exports, so its export industries will get a lift and will continue to get a lift out of building parts of Asia. But we think their internal economy, their demographics of spending, will continue to weaken until 2004. So we tell people Japan may take some bounces now and then, and it may have even bottomed. But it's still not going to be the best market to be in, and it's more likely to move sideways than up. In fact, that's one of the forecasts we made. We said the U.S. economy wasn't going to slow because of the Asian contagion and world crisis, and the market was misreading this. The thinking was that the rest of Asia was going to go into a long slump like Japan. But banking crises don't cause decade long slumps. Demographic trends do.

What are the demographic trends that are influencing your forecast right now? It's very simple. People enter the work force in their late teens or early twenties. Once they enter the work force, they earn and spend more money, raising families, advancing their career cycles till about age 46. So let's say from age 20 to 46 there's this very strong, upward spending, earning and productivity cycle. In other words, these baby boomers are not just expanding demand as consumers, they're expanding supply as more-productive workers. This causes the economy to boom. When a new generation moves in increasing numbers into their peak spending years, the economy will boom.

I am predicting that we will see a long, deflationary recession or depression starting around 2009. This pattern is pretty much a fact, not a theory. It comes out of consumer expenditure surveys and has been consistent for a decade. The average family spends the most money in their lifetime between age 45 and 49 and we've narrowed that down with studies and interpolation to about 46. We know exactly how many people will be moving into these age ranges in the future. Therefore, we can project -- as we have since the late 1980s -- that this economy will continue to boom until about late-2008, mid-2009. The reason this growth is unprecedented is because of the size of the birth trend before and after World War II, not just in the U.S. and Canada, but even more so in Third World countries.

And you say at that point the Dow should be 35,000 or 40,000? Yes. In our new book we have a second channel that shows the market could get as high as 41,000.

After the boom But what happens when this population bubble passes those peak years? Can we expect a bust after 2009 that is as bad as the boom that precedes it? Yes. I am predicting that we will see a long, deflationary recession or depression starting around 2009. This downturn will not be as extreme as the Great Depression, but it will be more difficult than the recessions and unemployment in the 1970s and early 1980s. But in this new book we give very clear strategies for investing in the best sectors for that changing season so that you can continue to grow your net worth without going into cash or gold. High-quality corporate bonds, select international stocks and ultimately small-cap stocks will do well from 2009 to 2023, just as these sectors did well in the Great Depression.

So let's focus on the bright side for now. What stocks do you think will respond in the "Roaring 2000s"? We say within the large-cap growth group, there are huge sectors that are favored by demographics -- technology, financial services, health care. These sectors have outperformed the S&P 500 in the last five to 10 years because of demographics, and our trends say they'll continue to outperform.

We found that software in general is the best risk-return sector in the entire market. Let's start with some names in the technology sector. Right now, we like the enterprise software companies. That's everybody from Oracle (ORCL), to PeopleSoft (PSFT), SAP (SAP), Baan (BAANF), J.D.Edwards (JDEC), those types of companies. We found that software in general is the best risk-return sector in the entire market and in technology. We have a big sector of software that has been beaten down by Y2K fears and yet, with just a couple months left in the year, sales in these companies are not down as much as was thought because of companies redirecting their budgets for Y2K. And in a few months, after the first of the year, companies are going to be buying new software upgrades.

What do you like in health services? There, we like small-cap biotechs. We especially like those that have gone through big corrections. A lot of these companies are starting to report positive research and we think that whole sector is going to cook in the next decade and is a good buy now.

Names, please. There's a bunch of companies. But you have to be diversified in this sector. There's Xoma (XOMA) and there's Cephalon (CEPH). There are tons of companies there that go up and down. You have to buy 15 or 20 companies because a few -- four or five of them -- are going to break through and triple or quadruple while the rest of them are going to go sideways or down.

What about financial services? It's a little early, but in the next few weeks we think there's going to be a good buying opportunity in money center banks -- Chase Manhattan (CMB), J.P.Morgan (JPM) -- and the brokerage firms. Everybody from Schwab (SCH) to Merrill Lynch (MER), Morgan Stanley Dean Witter (MWD) will do very well.

Online advice What do you think of online investing? I really think the industry's going more towards online advice. There's no question that online interaction is the trend. But there's also no question in my mind that as baby boomers age, their time is more valuable and they are going to want online financial advice. If you're going to have an adviser help you deal with taxes, mutual funds and diversifying your portfolio, it would be so much easier to do that online, especially when we get video capabilities on the Internet, which is, I'd say, at most three to five years away. Details

1-yr Chart

Earnings Estimates

1-yr Chart

Earnings Estimates So you're saying that what's going to change is more how investors interact with their advisers than how they invest? Exactly. Some things you may do yourself. You certainly can get online and check your statements, individual stocks and mutual funds. But studies by Dalbar show that 89% of people who have more than $100,000 invest with the help of a professional. What's happening is E*Trade (EGRP) and Schwab and the online trading firms are getting people in their mid-to-late 20s and they tend to lose them in their mid-to-late 30s when they have more assets. A new firm, 1-800-MUTUALS, already offers systematic portfolios through an adviser for different risk levels at low minimum account sizes and at low annual management fees. So I think E*Trade is going to get in the advice business eventually as well. Charles Schwab already has a network of 3,000 advisers that they refer people to when they get to the point where they need advice. I think the financial services industry is going to move online big time.

You have a particular strategy for taking advantage of market corrections. What is it? In a market like this, the upward momentum is so strong that people start to get nervous and jump out. And what ends up happening is that the market just goes higher without them. Then they finally jump back in when they think they are missing out. The one thing we know about the market is that it overreacts. So we tell people to be like Warren Buffett: Know the sectors you want to invest in. And any time there's a correction, buy more and tilt your portfolio more toward the strong sectors that get hit the hardest.

Interviews

Recent Interviews:  Fidelity manager tells which sectors spell success, 9/30/99

 Socially responsible, yet exceedingly profitable, 9/23/99

 He's fueling the flame for mid-size stocks, 9/16/99

More Can you give us an example of how that's worked in the past? Asia, outside of Japan, has been one of our highly recommended sectors, and it got smashed in early 1998. Korea has some of the strongest demographics in the world, and it went down 80%. We were telling people, "Buy in Korea, Hong Kong, Singapore." You could have just tilted your portfolio more toward Asia and made a killing. In that area, we like the Matthews Korea Fund (MKORX). Same thing in late 1998. The U.S. market got hit -- financial services companies, the money center banks, the investment brokerage firms, two of the sectors we're very hot on long term, down 60% because of an overreaction to the international crisis and the hedge-fund problem. So having an intelligent response to a market overreaction is the best way to play corrections. You don't have to be out of the market. You get paid for sitting through short-term corrections.

Any words of wisdom on Y2K? We can predict long-term fundamental trends in the stock market, but you can't predict the impact of Y2K. Some people say it will be massive and some think it's going to be a non-event. We've been saying it will be close to a non-event. There will be some problems, but no national disasters like major bank or financial services failures. In fact, financial services are the best prepared for the crisis. There might be a correction at some time, but you can't predict when it's going to hit or how hard. So the best thing to do is to have a planned, intelligent response. In fact, we think the market's probably going to turn around before the end of October, if not earlier. People who pull out are going to probably miss a large part of the next bull run.

-- Homer Beanfang (Bats@inbellfry.com), October 07, 1999

Answers

I've read both of Harry Dent's books and if he is correct (his first book seemed to be right on target), he will be my nominate for the nobel prize in Economics. To say as he does, that economies are completely governed by demographics is an idea so simple and novel that one can hardly believe it. Time will tell.

Here is where I think he will stumble:
I don't think we will make it to the year 2009. Our whole science of economics is based on 3 faulty precepts:

1. Human endeavors are so insignificant that they have no effect on the environment. As an "external factor" the cost of mucking up the environment is never part of the model. A factory may pay a fine or be required to clean up (as best they can) a toxic spill, but the cost of a polluted estuary on the food chain or the effect of overfishing the grand banks is just not a part of the picture.
2. Purchasing decisions will be made by rational, informed men. Ha! Purchases are made by irrational, uninformed, media manipulated men, women and children everyday. The next time your kid saves their allowance until they can purchase a "Malibu Barbie" or "X-wing Extreme Jet Thingy" that your kid didn't know they needed until viewing the commercial, they'll do it too.
3. There is no saturation level of toys, goodies, houses, cars etc. Consumers can always be induced to buy another widget if it is properly marketed. More things make you more happy and satisfied. There is a saturation level. Some of us reach it sooner than others.

If you want a counterpoint to H.S. Dent, read "beyond growth" by former world bank economist: Herman E. Daly.

-- Berry Picker (BerryPicking@yahoo.com), October 07, 1999.

Subject: Forecaster sees Dow 41,000 in the next decade

ON WHAT PLANET??

-- .. (..@....), October 08, 1999.

THIS PLANET IDIOT. If I told you in 1990 the DOW would reach 11,000 you would have laughed (it was around 2900+ then).

The poor saps that listen to dillweeds like yourdon and north are going to miss out.

-- 2bad (mo@mony.fo.me), October 11, 1999.