Booknotes

Mr. JAMES GLASSMAN (Author, "Dow 36,000"): Well, it's funny, Brian. I thought your were going to say what happens when--when I'm accurate. What happens to my career? I hope my career continues. I think the Dow is, actually, going to go to 36,000 soon. It's very difficult to predict how long it's going to be. The point of the book is to say that we have a new theory on valuing stocks. And based on our theory the Dow should be at 36,000 right now, like this minute. How soon it will take to get there, I don't think anybody knows. We say three to five years. There will be dips along the way. But, you know, I'm a--there's no doubt that Kevin Hassett and I are out on a limb. But we firmly believe in what we say in this book.

Mr. GLASSMAN: About 50 percent. It's quite remarkable. In 1965, only about 10 percent of households owned stock. In 1990, about 20 percent. There was a survey in 1997 by--by Hart Associates that showed ownership at 43 percent. And probably the best estimate today is about 50 percent.

Mr. GLASSMAN: I do. I do. It's certainly not all of my financial assets, which is something that I say in the book and it's also true of my co-author, Kevin Hassett. But I own a lot of stock. And I think stock is a good thing for people to own if they're in for the long term. That's important. If you ju--if you're just going to jump in and out of the stock market, forget it. But if you can keep your money invested for a long time, as we say in the book, makes a lot of sense to own stocks.

Mr. GLASSMAN: Well, it's funny because Kevin Hassett and I had offices, we s--well, at that point we had offices next to each other at the American Enterprise Institute. Kevin is a real economist. I am--I just, as he--as Kevin says, `You just play one on TV.' But, Kevin's a real credentialed economist and I am somebody who, at the time, was doing work for AEI, a think tank, and also writing a column for The Washington Post. And we both began to think about and talk about the same thing at the same time, which is `What is going on with the stock market?' The stock market continued to go up and up and up and yet all the pundits, all the experts were saying, `It can't last. The market's going to go into the tank. The stocks are overvalued or at least fully valued.' And they were just wrong, consistently wrong. So what we did was we set about to find a new way to value stocks because we believed that the old way has been repudiated by history. And that led to an article in The Wall Street Journal in March of 1998, to which we got a pretty nice response, and that led to a bunch of publishers calling us about writing a book and so we decided to write a book.

Mr. GLASSMAN: Well, 36,000 is a figure that we believe the market will rise to and th--at that point begin to level off. We think that--that stocks are, right now, undervalued--significantly undervalued. A year ago when we began to write the book the Dow was, actually, below 8,000. In late August, it was about 11,000. We think it's going to 36,000 and the reason is the theory that we lay out in the book. What p--the ratio of prices to earnings, a bunch of stuff like that which is a little technical, although I think we--we make it pretty simple in the book, brings us to a Dow of 36,000.

Mr. GLASSMAN: Not really all that much. The book is--is written for--at the same level as my columns in The Washington Post. So it doesn't require any grounding in economics. I, personally, only took one economics course in college and I understand the book 'cause I wrote it. It--it really tries to aim at a level of kind of general intelligence, not specialized intelligence. And it really does two things. It teaches people about the market in general and it lays out this theory. And, actually, a third thing, which it tells you what to do after that. You know, if you believe in the theory, and we think--we think you probably will after you read the book, then here's what you should do with your investments.

Mr. GLASSMAN: Right. I was the editor.

Mr. GLASSMAN: Mary Glassman was the--was the publisher.

Mr. GLASSMAN: Before that--immediately before that I worked for US News & World Report and The Atlantic Monthly, which is kind of ironic since we have an exc--not ironic, but we have an excerpt in the--in the September issue of The Atlantic Monthly, and I was on the business side. I was the executive vice president of US News & World Report and I was the publisher of The Atlantic Monthly magazine at the same time. I did that for two years. Before that, I was the publisher of The New Republic, again on the business side. And before that, I was at The Washingtonian magazine on the editorial side. And before that, I was running my own newspaper in New Orleans, doing both editing and publishing. I've sort of bounced back and forth between the editing side of journalism, which is, you know, fixing other people's stuff and writing headlines and writing myself, and the publishing side, which is running the business.

Mr. GLASSMAN: Six. I think that's right. I--I--I joined Roll Call as editor, I believe, in 1987, and did it until 1993 when we sold the paper. I originally got to Roll Call because I was being--I was serving as a consultant to Arthur Levitt, who at the time was the chairman of the American Stock Exchange and wanted to get into the publishing business and was looking around for publications. I was helping him. I helped him buy it with no intention of ever working for it. I knew nothing about Capitol Hill, by the way. And--but I--but he persuaded me and so I started to do that. And then, Arthur Levitt ended up being chairman of the Securities and Exchange Commission. We sort of both--we're both kind of in the same business now.

Mr. GLASSMAN: I just--I met him through--I, actually, can't even remember who it was, but just a mutual friend. I had just left US News & World Report and I was doing some consulting. And this friend said, `Arthur, here's a guy you ought to talk to if you're thinking about buying publications.' The first publication we looked at, in fact, was National Journal, which is frequently mentioned on this show and you've--you have--you have a lot of National Journal people here.

Mr. GLASSMAN: Right.

Mr. GLASSMAN: Well, in--just before I went to Roll Call, I wrote a column at--it was really Marty Peretz's suggestion, the editor in chief of The New Republic, for The New Republic called The Money Culture. And I did it for about a year and a half and I really enjoyed writing it. I wrote--it was like every two or three weeks and it was about Wall Street and society. That was basically it. And even before that, I wrote a p--a personal finance column for The Washington--for The Washingtonian. And even before that, when I was running this kind of alternative, almost hippie newspaper in New Orleans I covered business. I was just interested in the subject.

And so when I left Roll Call, when we sold the newspaper to the Economist, I really was at--delightfully out of a job and really didn't have anything to do. I went to go to talk to Don Graham, who's the--he's the CEO of The--of The Post and I said, `You know, I've--I've lived in Washington most of my life. I grew up here. I would really like to do something with The Washington Post.' And he said, `Well, what do you want to do?' And I said--I mean, it was really a question whether it was on the business side or on the writing side. I said, `Well, you know, I'd like to write the column that I was writing for The New Republic for The Washington Post.' And he said, `Great. We've got a new business editor, David Ignatius, talk to him.' And so I did. The timing was--just happened to be perfect 'cause David was taking over as--as editor of the section and so that's what I did.

But as it evolved, it wasn't really the--the column that I wrote for the--for the--for The New Republic. It was a completely different column. And I got more and more interested in stocks and in investing in general. And I, actually, wrote two columns. I wrote for The Post for six years, up through the end of June. I wrote a--an investing column and I also wrote for three of those six years an op-ed column, which was political economic. I stopped doing that back in--in January. But what I found was I was more interested in the financial side and so were my readers. I've certainly kept an interest in politics and there's some politics or public policy kinds of things in this book.

Mr. GLASSMAN: Well, the crash of s--of '29 was an enormously important event in American history. Franklin Roosevelt stepped in and--in an emergency and essentially said, `Look, we can't have the--we can't--we can't have people starving on the streets. We can't have people in the s--in dire poverty.' Unemployment was at 25 percent. The stock market, at one point, was down by 75 percent. And at the time, a lot of individuals were in the market. A lot of them were margined, which means that they borrowed money to go in the mar--in the market. It was--it was really a devastating time. So at the--at that point, Roosevelt put in place, with the help of Congress, the New Deal, which was a s--a structure that really bought government into people's lives in a much more aggressive way than it ever had been before.

We--we got Social Security out of it. We got, pretty much, welfare as we know out of it. We got a lot of regulations, a lot of the federal regulatory agencies that are around now are th--were the result of the crash and its aftermath. What we argue in the last chapter of the book is that broad stock ownership is creating the same kind of change that the crash created 60 years ago--70 years ago now. And as more and more Americans own stock, it's going to have a big effect on politics and I think a big effect on policy because they'll have much more of a stake in American companies than--than they do if they don't own stock. They will probably change their views and we're alre--I think we're already seeing that on such issues as taxes and regulation. And were already seeing a--kind of a dismantling of the New Deal and I think that will proceed very quickly as more and more Americans own stock.

Mr. GLASSMAN: The Securities Exchange Commission is the main regulatory agency for the markets, for the t--the financial markets and also takes care of the reporting of companies whose stock is traded in those markets. They, by the way, run a terrific Web site. They have--they have something called EDGAR, and you can find out about--all the filings are now just up there on--on the Internet. A lot of what the SEC does, actually, is done not necessarily by decree or by law as by pressure or a persuasion. The exchanges, actually, are self-regulated as much as that is possible. But frequently, they self-regulate, they--they kind of p--institute rules at the urging of the SEC. And it's--it protects--I--I guess if you asked Arthur what--you know, what his main job is, he would say to protect investors. And while I am generally skeptical about the role of government in our lives, I think the SEC does an excellent job of making people confident when they invest their money. Doesn't mean there's anything guaranteed. But what they know is they're getting honest figures from the companies that are reporting their profits and their--and their sales because if they don't give you pro--accurate information, it's fraud and people can go to jail.

Mr. GLASSMAN: Correct.

Mr. GLASSMAN: Right. He was the chairman of the American Stock Exchange. He wasn't the--he wa--I, actually, don't know exactly what his--the difference between the chairman and the--and the president. W--I don't know if he was actively running it on a day-to-day basis, but he was the chairman of the American Stock Exchange. That's correct.

Mr. GLASSMAN: He wa--he was always interested in publishing. He had gotten into publishing ba--I think it was his first job or his second job out of college he worked for Time--Time-Life, as it was called at the time. And he likes Washington. I mean, he's--he--he enjoys--now he enjoys living in Washington. He didn't at the time.

Mr. GLASSMAN: Sure.

Mr. GLASSMAN: Roll Call was a publication that was started in 1955 by a guy named Sid Yudain, who was a staffer for a Republican congressman. And it wa--and the way Sid conceived it and the way I think it still is is as a--kind of a hometown newspaper for Congress and for the people who work on Capitol Hill. It was a brilliant concept. It was kind of a cross between a small-town newspaper, a newsletter and a trade publication. Then in 1986, I think it was, Arthur Levitt came in, bought the publication from Sid and pumped a lot of money into it to improve the quality of the reporting. We went twice a week, we aggressively sold advertising and really made it into, I think--I think--Mary Glassman and I think, with Arthur, made it into a financial success, which it had not been although it was quite influential. And made it, I think, much more influential on the Hill. Now it's a--really a thriving enterprise.

Mr. GLASSMAN: Well, I earn--I learned a lot. I mean, wh--I knew--you know, I was born in Washington. And I have to say that I--I rarely, if ever--I don't even know how many times in my entire life I had been on Capitol Hill. It was not--it was kind of alien territory. One of the things I learned about Capitol Hill is that it, indeed, is a self-contained community, somewhat insular, has its own culture, has its own kind of style. And it's difficult to understand that unless you're kind of in the middle of it and that's what I think--I think that's a contribution that Roll Call made. The thing about Roll Call is it doesn't report on policy, which is what most people do in Washington. You know, like the progress of a specific bill, that kind of thing. Instead, it reports on what's going on within this little town, let's say secure--important security issues, who--or who's going to be the n--next chairman of what committee, a lot about politics, about congressional politics, who's going to get re-elected, that sort of thing.

But what did I learn? I think I learned that Congress is a very different kind of institution from the executive branch. A--it's much more, kind of a self-perpetuating insular sort of place. I generally was impressed with the level of intelligence here, maybe more with people in the House than in the Senate. It--a--and--and the level of intelligence and incredible hard-working activities of--of--of the staffers.

Mr. GLASSMAN: I think so. I think they really should. I mean, C-SPAN does an excellent job. I think Roll Call does a good job. But, in general, most newspapers don't report very well about the goings-on in Congress. That changed a little bit after the House Bank scandal, which was a story I proudly say that Roll Call broke, Tim Berger, who is now I think at The New York Daily News. But--and after that, you know, it became clear. Wow, things that go on within Congress can actually affect whether my congressman survives or not. So--so there was--there certainly was more interest in what happens internally as a result of that, but I think, in general, people don't know am--enough about what goes on in Congress. Lots of very interesting hearings, the battles for committee chairs, things like that, I think are very interesting. But the press has mainly focused on what happens in the White House, which is also very much more orchestrated than what happens in Congress.

Mr. GLASSMAN: Right.

Mr. GLASSMAN: Well, I think that's something you gotta watch out for, but in general, I don't think it's a--I don't think it's a problem. I don't think there are--there are very few people who come in from industry and then become reluctant regulators. Maybe they should be more reluctant than they are.

Mr. GLASSMAN: I--I don't know. I think they kind of--they get imbued with a--with the culture of Washington and the culture of their own institution. It's very hard when you come from outside to become the head of a department and not have the--the bureaucrats, the people who've been in the--in the department for a long time and the traditions of the department influence you. I mean, you know, think about Bill Bennett, head of the Education Department, you know, he's the kind of person who might have wanted to, let's say abolish the Education Department. There's never any chance that he would do that. Even--probably even better example is Lamar Alexander, who, you know, talked about deregulation and how he was going to, you know, get government out of everybody's hair and really didn't--certainly didn't do that when he was head of the Education Department. Even Jack Kemp, as the head of Housing and Urban Development, I mean, you won't--you--it's hard to find a more--someone who's more skeptical of the role of government in--in that kind of area. And he certainly didn't act in that way. So I think you get kind of co-opted by--by the institutions themselves.

Mr. GLASSMAN: Right.

Mr. GLASSMAN: Well...

Mr. GLASSMAN: I think that's a--that's a good--that's a very important question and it's--it's kind of a complicated answer. The argument that--one of the arguments we make in this book is that people have been really scared of stocks, much more than they should have--they sh--than they--than they should be. And when you're scared of a particular kind of investment, it means that you don't want to pay a high price for it. And as a result you get a pretty big return. That's essentially what's happened with the stock market. Now we--we see people becoming less scared of the stock market, understanding that it's not as risky as they thought it was. And therefore, are bidding up the prices of stocks. And we think that's a rational response.

Now how much of that decline in risk is the result of government policies? I think some of it is. And we say that in the book. We list about 10 different risk factors we think have de--are declining. And one of them really is better government management, both on the monetary side, which is what the Federal Reserve is in charge of, and on the fiscal side, which is essentially, taxes, and on the regulatory side as well. Also, national security has generally improved. You know, if you're in a cold war, if you're worried about a nuclear bomb going off, you're apt to be a little bit more reluctant to put a lot of your money into the stock market. So in those senses, government, I think, has had something important to do with the rise in the stock market.

Mr. GLASSMAN: What is driving what--what government is doing or...

Mr. GLASSMAN: I think it's really--I think it's--I think it's pretty much evolutionary. In a way, the New Deal was an aberration, in my opinion, that America has always been a country which--on the spectrum of freedom or private enterprise or, you know, slug it out in the marketplace, competition being the best way to solve problems and get the best products, the best services at the lowest cost. I mean, this country, throughout the 19th century and through most of the 20th century, was on that part of the spectrum.

And then the crash occurred and then government stepped in. It was an emergency and I think it was perfectly appropriate to do that. Now I think over the last six years we've seen a--a slow evolutionary dismantling of the structures that were put in place during a period that began with the New Deal and probably ended arou--with Lyndon Johnson, maybe ended with Richard Nixon, somewhere in there. Since then, things have changed and why? I think it's probably because people have--have become more understanding that markets are usually the best solution, especially to economic problems. And more and more people have come around. You--you take somebody like Larry Summers, who's the secretary of the Treasury, his tradition--certainly the tradition in which he was schooled was generally Keynesian in the sense that government intervention was almost a very necessary part of running any kind of an economy. Well, based on what he's been saying in recent years, he doesn't believe that anymore. He believes that markets are the best way to solve problems.

Mr. GLASSMAN: No, I never have.

Mr. GLASSMAN: I don't think so. I mean, maybe if it was--if it was the right job I would want to. But--and I don't--I'm not exactly sure what that right job would be. Secretary of the Treasury, I would take that job.

Mr. GLASSMAN: Well, I--the label I put on myself is libertarian, which is--no, not Democrat, not Republican. It means that I think that--that liberty as opposed to other kinds of political values is the most important one. I mean, I'm not a--kind of a raving libertarian. I don't believe that everything ought to be privatized, that--you know, H Street in downtown Washington should be privatized. But I do believe that private solutions are frequently a lot better than government solutions, partly because they give people personal freedom, which I think is something that's enshrined in the Declaration of Independence and the Constitution. So that usually puts me on the side of Republicans on economic issues and frequently on the side of Democrats on social issues. In other words, I don't believe, as a lot of conservatives do, like--let's say, Bill Kristol, the editor of--of--of The Weekly Standard or even Bill Bennett, whom I've--both of whom I really like personally, that government should play a role in kind of enforcing a--kind of a moral code for Americans. I think that's--that's not the role of government. So in that sense I'm a libertarian. I'm actually a registered Democrat, although I frequently vote Republican in elections.

Mr. GLASSMAN: I live in Washington, DC, but I spend a lot of time in New York, and I think more and more I'm moving to New York. I would say, at this point, it's probably half and half or maybe even more New York than Washington.

Mr. GLASSMAN: Mm-hmm.

Mr. GLASSMAN: No, I am with them.

Mr. GLASSMAN: Hmm-mm.

Mr. GLASSMAN: No, I'm very much with them. I was--I've been with the American Enterprise Institute since October of 1996, and I am--I do lots of different things, but mainly research on different subjects. They're very tolerant of things like writing books. I mean, in the last year, I've been writing my book, writing columns and that's something that the American Enterprise Institute is very happy for me to do. Before that, I did a project on charter schools, which interested me a lot, and on Social Security--reforming Social Security, which I continue to be interested in and I've--I te--last year testified--or this past year testified in Congress three times on the subject. I'm really interested in Social Security, but I've not written about it too much lately.

Mr. GLASSMAN: Mm-hmm.

Mr. GLASSMAN: Dow is shorthand for the Dow Jones industrial average, which is a group of 30 stocks, including companies that most people have heard of, like General Electric, Exxon, J.P. Morgan, which is a bank, a diversified group of stocks, which represents the US economy pretty well, remarkably enough, even for 30 stocks. So the Dow has been taken as a--kind of a proxy or a substitute for the market as a whole, throughout--well, certainly throughout the last 70 or--70 years, at least. And so when we wanted to kind of use a shorthand for the market as a whole we use the Dow. There are other kinds of indexes and averages that you could use, like the Standard & Poor's 500 stock index, but the Dow is what--what most people follow and it's actually a pretty good reflection of the market.

Mr. GLASSMAN: That's another index and that includes 500 stocks instead of just 30. And that's put together by a company--investment company called--research company called Standard & Poor's. It's kind of a funny name. And it's 500 stocks and they're weighted or their--their--their value in the index is according to how big they are in the stock market. So the number one stock in the S&P 500 is Microsoft. Number two is General Electric. Microsoft is not even in the Dow 30, so you have two different averages that most people tend to use. And curiously enough, they've been pretty consistent over the years. In other words, the Dow, even though there are only 30 stocks in it as opposed to 500 stocks, is a good reflection of the market. And the whole--the stock market as a whole--if you take the three exchanges, th--that most people trade their stocks on, the New York, the American and the NASDAQ, they're to--a total of more than 7,000 stocks. So it's very convenient to have an average like the Dow that reflects the whole market.

Mr. GLASSMAN: The Russell 2000 is another one of these averages and it's--it's put together by a company called Russell, which is based in California, that focuses on small stocks, what they call small cap or small capitalization stocks. The capitalization of a company is the number of shares it has outstanding times the price of the share. So it's really the value that stockholders put on it. So Microsoft, right now, has a market cap or a value of a half a trillion dollars, $500 billion. In other words, if you wanted to buy Microsoft today and you happen to have $500 billion, you could theoretically buy it at that price. The small cap stocks that are in the Russell 2000 generally have market caps that are below $2 billion and a lot of them are in the few hundreds of millions of dollars.

Mr. GLASSMAN: You--you take today's stock price--so let's say Microsoft's stock price is--let's make it simple. Let's say you have a company that's got a market--a stock price of 100. Let's say Microsoft is 100. It's not really, but let's just say it is. And let's say there are five billion shares outstanding. In other words, stockholders own five billion shares. You just multiply five billion times 100 and you get $500 billion and that's the value or market cap of Microsoft.

Mr. GLASSMAN: That's it. Microsoft...

Mr. GLASSMAN: ...has the largest. Is number one and that just happened last year. Microsoft is a--is a very new company. I mean, it's less than 20 years old. It's quite remarkable what's happened. It passed General Electric last year as the largest--largest capitalization company.

Mr. GLASSMAN: The Dow 30, companies like Johnson & Johnson, which is a big pharmaceutical company; Coca-Cola, which is one of the largest companies in America; Exxon; let's see, there are a couple of other oil companies; J.P. Morgan, which is a--a bank. And then there comes some--some sort of outliers that you wouldn't expect, like Union Carbide, which has been on it for a long time and are still there. The Dow gets changed every once in a while. Every few years the people at Dow Jones revise the index. And it's interesting that the last time they added a few technology stocks. It used to be called--well, it still is called the Dow Jones industrial average. But these stocks are not really industrial. I mean, the--J.P. Morgan, the bank, is not industrial.

They added a few years ago Hewlett-Packard, which is a technology company that's based in California. They didn't add Microsoft and, in fact, if they had added Microsoft, the Dow would probably be a lot higher today. But in general, it's a pretty good reflection--it's--it's quite amazing how you can just take 30 stocks, and as long as they're diversified--you know, you've got one in--the--General Electric's a very diversified company itself. It's in finance, it's in lightbulbs, it's in--you know, it makes airplane engines. You've got banks, you've got oil companies. You've got a pretty good ref--reflection of the stock market as a whole.

Mr. GLASSMAN: It's owned by the members, who are--who bu--who own seats on this--the exchange, which allow them to trade. So in a--in a way, it's like an association or almost a club. Now you can buy a seat. If you would personally like to buy a seat today, seats are actually, you know, go--are--are--are offered. You know, if I owned a seat, I could sell it to you. And there's a--an active auction market in seats. The New York Stock Exchange has announced that it is going to go public--it hasn't said exactly when--which means that it will offer stock to the public rather than having the stock just owned by the--the members who do the trading.

Mr. GLASSMAN: The American Stock Exchange actually just merged--or merged recently with the NASDAQ, which is the--used to be called the--it's the stock market for sort of smaller companies. Not really even true anymore. And the NASDAQ also has given some indications that it may go public, so that people can own stock in the NASDAQ. Well, what's interesting, actually, about the exchanges lately is that there's--competition is springing up through the Internet from kind of virtual exchanges or--electronic exchanges is a better way to put it rather than sort of bricks and--brick-and-mortar exchanges, where there are people on the--on the floor who are trading stock.

Now you've got companies such as Island that are trading electronically, and they are threatening the existence of old-time--of--of--of these traditional exchanges. I think that the New York Stock Exchange, which is a--a very well-run organization, is probably going to survive and NASDAQ will survive, but in a different kind--maybe in a different form.

Mr. GLASSMAN: Let's see, you got me there. Dow--I actually don't remember their first names, but they were--if--if I remember correctly...

Mr. GLASSMAN: No, no, they're--there is--there was a Dow and there was a Jones. And I can't remember their first names, but they were two guys who came up with this brilliant idea of somehow getting--by just selecting a few stocks, giving the public an indication of what's going on with all stocks. Now there are lots of ways to do--there's a thing called the Wilshire 5,000, which is an--Wilshire's another California-based investment company that tries to take all the stocks, all traded stocks, into account. All--they say 5,000, but actually there are more than 7,000 stocks in the Wilshire. So you have lots of ways to figure out what's going on with the stock market now.

Mr. GLASSMAN: Fr--I think his name is Frank Russell--Frank Russell and Company, an investment firm.

Mr. GLASSMAN: I don't--I think you--I'm not really sure. That's a really good question. I don't think so, but it's kind of a--it's a funny name. When I first saw it before I knew anything about investing, which is not too long ago, I used to think Poor's--I thought it had something to do with, you know, like, these were the poor stocks, plus a few of the standard stocks. But I don't think that's--that's what it means.

Mr. GLASSMAN: Yeah.

Mr. GLASSMAN: I hope that--that the average American will read this book. I mean, I don't--it--it doesn't require any special intelligence to read it. Certainly people who already own stocks and people who are--50 percent of Americans who are already in the market--many of them really scared. They've seen the market go up and up and up; they've heard the pundits say that stocks are overvalued or fully valued and, `Watch out. Things are going to get bad.' They've heard this for years and years, by the way, as the market has tripled, quadrupled. In fact, the market has gone up by a factor of 14 since 1982.

In other words, if you put $10,000 into the Standard & Poor's Index, into those stocks, or even into the Dow--actually, into the Dow--let's use the Dow as an example--you would today have $140,000. Started off with $10,000, you have $140,000 even if you didn't reinvest the dividends. You also get the dividends; you can spend those. It's been an amazing increase. And as a result, people are scared. I mean, you--you--you can't blame them. They think, `Gosh, I made all this money. How long can this last?'

Then you've got other people who are not in the stock market who are saying to themselves, `It's too late. You know, I--I missed the big increase in the market.' They've probably been saying this for the last five years as the market has continued to go up. So our book gives those people a level of comfort because we explain that, in fact, the market's not overvalued and we--we show why.

Mr. GLASSMAN: Oh, this is a neat story. And, actually, it's a story that I got from Martin Frisdon's book. It was--the book is called "It Was a Very Good Year," which is a book about specific interesting years on Wall Street. And we elaborate--Kevin and I elaborated on it in the book.

What happened was Charlie Chaplin was a big investor in the stock market. Charlie Chaplin, the--the famous actor, in his heyday was really--gets--in--in the '20s and the teens and--and on up into the '50s. And he had a lot of money in the stock market, and he--he was friendly with Irving Berlin, the great songwriter; wrote "White Christmas," among many others. And just before the market crashed--actually, the day before, according to the story, he urged Irving Berlin to get out of stocks. He, himself, Chaplin, had sold his stocks about a year before, and--and Chaplin was saying, `You've got to get out of stocks. The unemployment rate is 14 percent in America. Things are really bad. You've just got to get out of stocks.'

Well, the next day, of course, the market crashed. And in a sense Chaplin was right. Of course, he was wrong about the 14 percent. The unemployment rate was not 14 percent. No, it wasn't 14 percent. He said there was 14 million Americans out of work. There weren't 14 million Americans out of work. In fact, the unemployment rate at the time was very low. So Chaplin was right, but probably for the wrong reason.

But what we talk about in the book is that even though Chaplin was right for the short term--and Berlin lost a lot of money in the crash--if Berlin had stayed in the stock market, it wouldn't have taken very long before Berlin would have been considerably ahead of Chaplin--of course, depending on when Chaplin got back in. And you would assume, if you were Charlie Cha--and we don't know this for a fact, but we conjecture in the book that if you're Charlie Chaplin, you're not going to get back into the stock market during the Depression. It was the--the '30s. Most likely you're not going to get back in during World War II. That was--that seemed to be a bad time. And yet by the early '40s the market had recovered all of its losses.

And if Berlin had stayed in the market until his death, he would have had--I can't actually remember the figure but well up into the many tens of millions of dollars Berlin would have had, despite this large loss. And the c--there's a slight catch, which is Irving Berlin lived to be 101. But, still, the lesson is that you should be a long-term investor if you're in the stock market; that there will be ups and downs. And we even believe, even as optimistic as we are, Kevin Hassett and I, about the--about the market, that there're going to be dips, there may even be short-term bear markets. But in general, the market is going to go up.

Mr. GLASSMAN: That's been the history, and we think that's the--that's what's going to happen.

Mr. GLASSMAN: I don't know.

Mr. GLASSMAN: Well, bull--the bull is the indicator of optimism and of a market that is going up and up. A bear is the indicator of a market that is going down and that has been down for a long period of time, in some cases.

Mr. GLASSMAN: We are very--we are--yes, Kevin and I are very bullish. We are very bullish on the stock market. And it's--it's actually not easy to find bulls these days. There are people sort of moderate bulls; people who will say, `Yeah, I think that the market'll go up a little bit--or keep going up a little bit.' But, in general, I would say that the tenor of the market, from the people on Wall Street, is they're nervous and, if not outright bearish, they are only moderately bullish. We are superbullish.

Mr. GLASSMAN: Right.

Mr. GLASSMAN: Well, there are a lot of people who have invested in Internet stocks and have not done very well. First thing, let me say, is that the Dow Jones industrial average does not include Internet stocks. There's certainly companies that are influenced by the Internet, but it's really--these are not Internet stocks.

In the book, we talk about Internet stocks. And what we say is something that I've said in my column in The Washington Post many times, which is that it's very difficult to analyze these companies because most of them don't have any earnings. The value of a company really depends on the earnings or the profits that it's making. That's--that's one of the major points we make in this book. As Kevin and I say, we like things we can count. Basically, we like dollars. We like cash that we can count, profits. And you can't count the cash with most Internet stocks. So for that reason, we tell people to be wary of Internet stocks.

On the other hand--and this is what you mean by dancing around--we do believe that the Internet is changing the world and will continue to change the world. And it's--it's a phenomenal advance and will probably have a huge effect on the economy as well--a huge positive effect. And for that reason, our advice is to own s--in your portfolio of stocks, somewhere between zero and 15 percent in companies that have something to do with the Internet; certainly no more than 15 percent.

But it's very har--hard to analyze those companies, and it's my own belief that you ought to buy those companies more out of love than out of reason because you really can't analyze it. If there's a good idea, I don't see anything wrong with putting some of your money into the Internet stocks, as long as you're diversified. Don't put it all into one Internet stock.

Mr. GLASSMAN: Mm-hmm.

Mr. GLASSMAN: At the most. At the most.

Mr. GLASSMAN: I would put--we recommend putting most of it or let's say $50 or $60 of it into growth stocks; that is to say larger companies that have shown in the past that they can increase their earnings at a pretty good clip and have a--what we call a moat around their business, a kind of a franchise. Good example of a moat is the brand name of Coca-Cola. I mean, nobody else can make Coca-Cola. One of the companies we talk about in the book is Tootsie Roll. Now I have to say I'm not a great fan of Tootsie Rolls. I don't sort of eat them every day. But Tootsie Roll is a--is an old brand name that is an extremely well-run company. And while there may be competitors in the candy business, nobody's going to make a Tootsie Roll. Tootsie Roll also makes other stuff like Charms and Junior Mints and that sort of thing.

So brand names can--can--can form a moat. So we like that kind of company. But we also think that it's important to own at least a little--little part of your portfalio--portfolio should be in foreign stocks, international stocks because there are--there are lots of things going on outside this country, even though our theory is mainly a US-based theory.

And you should also own stocks that have been generally overlooked by the--by the market, which are called value stocks; stocks that are not really high priced, stocks that people tend not to like very much. So that--that--that's about it. We go into this in great detail because a lot of it depends on your own circumstances, like: How old are you? What is your tolerance for risk? That sort of thing.

Mr. GLASSMAN: Yeah.

Mr. GLASSMAN: Well, I think that that's accur--well, I'd say the president is the most powerful person, but I would say Alan Greenspan is second.

Mr. GLASSMAN: What Alan Greenspan does is regulate the money, regulate the--the dollar, which is the unit of currency that we all use, whether we like it or not--the value of that unit of currency. And he does that mainly by taking actions in the bond market that adjust interest rates, OK? So people say, `Well, the Fed raised rates.' And that's shorthand for what--what the Federal Reserve does. He's the chairman of the Federal Reserve.

So the main thing he's worried about is that inflation will erode the value of the dollar. For example, if inflation jumps to, let's say, 7 percent--well, in the next--that means in the next--less than 15 years from now, the va--the value of a dollar will drop from a whole dollar to 50 cents. And that can be very demoralizing. It can cause all sorts of problems with businesses making decisions for the long term. Inflation is not a good thing. So what the Fed does to prevent inflation is it ratchets up, raises insert--interest rates. And it does that through kind of an arcane method of going into the market and buy--either buying or selling bonds. But the effect is to raise interest rates.

Mr. GLASSMAN: A bond is a loan, which a lot of people don't understand. It's a--when I buy a bond, I am making a loan either to a company or to the federal government or to a--a municipality. And in return for that loan, I get an IOU back, which is a bond. So in simplest terms, let's say you buy a Treasury bond, US Treasury bond, that matures in, let's say, 30 years, which is the longest term Treasury bond. Let's say you pay $1,000 for it. What that means is you're lending the federal government $1,000, so it can use the money to--to pay for government programs because, in the past, the government has been running a big deficit. The government starts running a surplus for a long time, it's going to end up retiring all of its bonds, but that's another story.

OK, so I lend the government $1,000. The government pays me on a twice yearly basis a total of $60 a year, let's say, if the interest rate's at 6 percent. And I've got that as a guaranteed payment from now for the next 30 years. And at the end of 30 years the government will give me back my $1,000. It guarantees it.

Now in the meantime, I can actually go into the bond market if I decide, you know, `I don't want to hold this bond for 30 years. I want to sell it. I need the money,' I can go into the bond market through my banker or broker or sometimes do this sort of thing yourself and sell it to somebody else--sell the bond to somebody else and get maybe $1,000, maybe $1,500, maybe $750. Depends on what the market is like at the time. But if I hold it all the way to the end, I'm guaranteed to get $1,000. My loan is being repaid.

Mr. GLASSMAN: This country is really humming along right now. And that's--there's no guarantee, you know, that it won't--that we won't run into some rough economic times as a result of some outside influences. I mean, if there's a war, if there's--you know, something happens with oil in the Middle East. And certainly it's...

Mr. GLASSMAN: That's right. That's right. We have--we should not underestimate the fact that we have an enormously powerful economy. Why is a good question. I think part of it is that businesses restructured themselves in the--beginning in the early '80s.

Mr. GLASSMAN: To organize, to--to run better. I mean, that's a very important thing. We had a lot of companies that--in this country that were run mainly for the benefit of the managers rather than for the benefit of the shareholders. And sharehar--holders can be a very demanding audience. And what they want is more efficiency. So businesses cut their...

Mr. GLASSMAN: I think a lot of it actually had to do with the activities of people like Michael Milken, who ran into some trouble later, but who got the notion that a lot of companies in America were not run as well as they should be and that they should be making more money. And that if he financed certain people who might want to take over those companies or other companies that might want to take over them, that they would become better run, either because the companies themselves would get scared and make the changes themselves or because the new owners would make the changes. So that's one thing.

I think another thing is that we got a lot of competition from abroad, as a result of freer trade. The auto companies are a great example. I mean, if they had been insulated from competition from Japan, I don't think they would have improved their operations as--as much as they have. The auto companies--they're not finished, but a company like Ford is an extremely well-run company today, much, much better than it was 20 years ago.

Mr. GLASSMAN: I would tell them, first of all, to be very optimistic about the economy because anyone who's betting--for example, a Republican candidate who's betting on a big decline in the economy so that he can blame--he or she can blame Bill Clinton or Al Gore is making a big mistake because the economy is extremely strong today.

Mr. GLASSMAN: There is time. There is time. And there--there--there--there are no guarantees in this business, and we've had the largest--the longest peacetime expansion and we are--very shortly, we'll have the longest expansion that we've ever had. Expansion means a period when growth, as measured by Gross Domestic Product or the total of goods and services, is increasing. We're now seventh--I think we're now in the eighth year of an expansion. Pretty amazing. So--but can things go bad? Yes, they can certainly go bad, but I think the chances of that are--are not all that strong.

Mr. GLASSMAN: Mm-hmm.

Mr. GLASSMAN: Well, I do think that a Republican can--can say that things are great, but they can be better. And one way to make them better is to improve the ability of Americans or the incentives for Americans to continue to invest. And if I were a Republican or a Democrat, I would--one of the things I would point out is that about half of Americans have no wealth at all. They're not in the stock market. And, in fact, they have almost nothing in their bank accounts. And that's a real shame. I mean, we've had this 17-year increase in the stock market, and yet not all Americans have been able to participate in that and I think that they should. And our Republican candidates should be saying that, at least probably more than the Democratic candidate.

Mr. GLASSMAN: Well, the first step is to figure out your own--to--to make some--to--to sort of put down on paper or at least think out your own plan, financially, for your life. In other words, are you about to retire in two years or 30 years? That makes a big difference. Do--are you going to buy a house in the next six months? Are you going to have to send your kids to college? You need money to do that in the next few years. That is the first thing to do.

Mr. GLASSMAN: OK.

Mr. GLASSMAN: Great. OK.

Mr. GLASSMAN: Well, we have a wonderful system in this country where it's not necessary to talk to a stockbroker. We advise that people get help. I think it's a good idea to talk to a stockbroker. But you don't have to do that. And, in fact, you can go on the Internet, open an account at a discount broker, electronic broker...

Mr. GLASSMAN: The first thing...

Mr. GLASSMAN: The first thing I would do is call a stockbroker or another kind of financial adviser. I think that's an--I think it's a necessity for...

Mr. GLASSMAN: Oh, they're all over the phone book. You can read the ads. You should--you should call them and talk to them. We list in the book 10 questions you ought to ask a broker before you actually sign up because some brokers are--are in it for the commissions rather than in it to help you.

Mr. GLASSMAN: Well, this is a--something that's--that's changing now. And the way the brokers used to be compensated was through trades. In other words, if you--if you invested $1,000, on average, the broker kept $20 of it and that was the broker's--that's how the broker made a living. Today, more and more brokerage firms are moving toward a--instead of a--what's called a transaction-based system, toward one that--toward an asset-based system where the broker takes a percentage--or the firm takes a percentage of your total investment year by year and--which might be 1 percent or 1 1/2 percent. It might be 2 percent even. It might be 1/2 percent. Depends. You can negotiate that. Or you can skip the broker entirely and go into--and go do it yourself, which I, frankly, don't recommend for people who don't know anything about stocks because it's dangerous.

Mr. GLASSMAN: The easiest thing to do is to buy mutual funds. And if you don't know very much about the stock market, it makes sense to buy an index fund. We were talking earlier about the Standard & Poor's 500 stock index. That's an index fund. That's the way to ho--own the whole market--or not the whole--or 500 big stocks, very diversified and very liquid. In other words, you can buy and sell whenever you want, although we tell people to own for the long term. So that's something you can do very quickly.

Now in the book we really do urge people to consider owning individual stocks. But to put all your money into one stock is a big mistake. The big problem that people have is not so much buying the stocks in the first place, either doing it through a broker or doing it themselves, but what they do after they own the stocks.

And so we talk a lot in the book about ha--building a relationship with your stocks, trying to modify your behavior. I mean, one of the behaviors that people have when they own stocks is the market goes down a little bit, they get really scared and they sell, which is almost always a mistake. So we tell people little tricks to keep them invested in the market when that's the right thing to do. But it's not hard to own--to get into the market. But we advocate getting some help.

Mr. GLASSMAN: Right.

Mr. GLASSMAN: You're right. They are my daughters. Yeah.

Mr. GLASSMAN: Well, I know their names. So I...

Mr. GLASSMAN: I don't know--I don't know--I don't know Standard & Poor, but I know Zoe and Kate.

Mr. GLASSMAN: Yeah.

Mr. GLASSMAN: My two daughters are--are Zoe Glassman, who is my 26-year-old daughter who lives in New York and who is in the entertainment production business; used to--used to work here at the--at the Kennedy Center. And my other daughter is Kate Glassman Maddox, who just got married in April to Justin Maddox, and the two of them moved to Las Vegas, where I just recently visited them. And Kate is a columnist for the Las Vegas Sun. She used to work, actually, in this very building at CNBC.

Mr. GLASSMAN: I would rate it extremely high. I mean, writing a book is--is very difficult but extremely rewarding. And it was something that my agent--my book agent, Raif Segalin, told me 15 years ago. He said, `You know, if you're a writer, you really have to write a book to be a s--to be considered a serious writer.' And I used to say, `Oh, Raif, I don't have the time. I don't'--I mean, he kept at me for 15 years. I finally wrote the book. So it--it was a very--it was a difficult experience and I think the fact I wrote it with somebody was a big help. Kevin Hassett was great, was a terrific collaboration, but I would put it very high up on the list. I really enjoyed doing Roll Call, and I also enjoyed doing my--my very first--my very first newspaper in New Orleans called Figaro. But this is right on top.

Mr. GLASSMAN: ...(Unintelligible).

Mr. GLASSMAN: Thank you, Brian.