20,000 is only a number and the Dow Jones Industrial Average is a very quirky index. Yet, the financial press and a multitude of investors are obsessed with when and if the Dow Jones Industrial Average will reach the 20,000 level.
The fact that people monitor the Dow is an artifact of history. It is the only price-weighted market index, a methodology that -- without sound logic -- more heavily emphasizes moves by higher priced stocks than their lower priced counterparts. People still refer to how many points the Dow is up or down, even though a one-hundred point move is roughly half a percent today and it was approximately five percent at the time of the 1987 crash.
Investment pros more closely monitor the S&P 500 index, a much broader-based, value weighted index in which larger capitalization stocks are given more weight than smaller stocks. Yet, there was little fanfare when the S&P 500 crossed the 2,000 point threshold for the first time in late August of 2014.
Big round numbers fascinate investors. Technical analysts, those market professionals obsessed with charts, trading volume and momentum focus on price levels and talk of support and resistance at certain numbers, viewing breakthroughs as portending future price movements. As a devout value investor who grew up Omaha, Nebraska, in the shadow of Warren Buffett, I had disdain for technical analysis and charts. Having studied investments for nearly forty years, I have modified my belief. Big round numbers can and do have an impact on investment markets simply because investors believe they can have an impact. Yes, the markets are somewhat driven, at least in the short-term, by animal spirits.
And speaking of spirit, the Financial Crisis of 2007-8 literally broke the spirit of many investors. When the DJIA was trading under 7,000 many investors capitulated and bailed entirely out of the equity markets in an effort to save their 401ks. Fear motivated investors. The joke back then was 401ks had turned into 201ks. Since that time the stock indices have nearly tripled and the supposed "safer" bond alternative has underperformed. Happy days are here again.
Flows into equity mutual funds have increased dramatically over the last month, and that doesn't surprise most market pundits. The irony is that as stocks get more expensive people want to buy more of them. Investors are optimistic because they choose to be. Greed is motivating investors who don't want to miss out on this market boom.
I would caution investors to heed the words of The Oracle of Omaha who said, "Be fearful when others are greedy and greedy when others are fearful. Failing to take Buffett's advice can result in investors getting the most common investment maxim backwards. That is, they end up "buying high and selling low."