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From slightly less than 4000 in early 1995, the Dow surged to 11723 in early 2000. To
put this remarkable 7723-point rise in perspective, consider that the Dow first reached
1000 in 1965, then took another 22 years to hit 2000, then four more years to reach
3000, and another four to get to 4000 (in 1995). Then, in just over five years, it
reached 11723. Thus, in those five years investors made almost twice as much in the
stock market as they made in the previous 70 years!
That bull market made it possible for many people to take early retirement, buy
expensive homes, and afford large expenditures such as college tuition. Encouraged
by this performance, more and more investors flocked to the market, and today more
than 79 million Americans own stock. Moreover, a rising stock market made it easier
and cheaper for corporations to raise equity capital, which facilitated economic
growth.
However, some observers were concerned that many investors did not realize
just how risky the stock market can be. There was no guarantee that the market would
continue to rise, and even in bull markets some stocks crash and burn. Indeed, several
times during 2001 the market fell to below 10000 and surged above 11000. In fact,
the market fell all the way to 8236 in the days following the September 11, 2001, ter-
rorist attacks.
Note too that while all boats may rise with the tide, the same does not hold for
the stock market—regardless of the trend, some individual stocks make huge gains
while others suffer substantial losses. For example, in 2001, Lowe’s stock rose more
than 108 percent, but during this same period Enron lost nearly 100 percent of its
value.
While it is difficult to predict prices, we are not completely in the dark when it
comes to valuing stocks. After studying this chapter, you should have a reasonably
good understanding of the factors that influence stock prices. With that knowledge—
and a little luck—you may be able to find the next Lowe’s and avoid future Enrons.
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