The Dow Jones industrial average's bad behavior may give you cause to doubt the durability of the great bull market. Don't worry, says Harry S. Dent Jr., the author, lecturer, and money manager. The bull market is as vast and powerful as the baby boomer generation, and the two are inextricable. The 80 million or so boomers--those born between 1946 and 1964--are hitting their peak earning, spending, and investing years, and that's what's driving the economy's incredible performance and the stock market's spectacular returns. His target for the Dow is 40,000--which he believes it will hit somewhere around 2008.
After that, watch out. As an economic force, the boomers will have peaked, and there just aren't enough Generation Xers to sustain the economic and stock market boom. Even the revolutionary changes wrought by the rapid growth of the Internet don't change that. In Dent's view, the economy goes into a deflationary funk for another 10 or so years, until the boomers' children--the 83 million "echo baby boom" generation--reach their economic prime. Dent's warning: Make your money now, and secure it before the inevitable bust that can take the Dow down to 10,000 again (chart, page 212).
Demographics as destiny? It's a simple idea, really, and with it, Dent, a 46-year-old boomer himself, has built quite an empire. His latest book, The Roaring 2000s Investor, is fifth on the BUSINESS WEEK Best-Seller List. His previous work, The Roaring 2000s, is ninth on the BW paperback list. On the lecture circuit, Dent is a favorite of brokerage firms and mutual-fund companies, which use him to fire up their sales forces and investor groups. He recently upped his lecture fee to $50,000. "I'm trying to cut down on the speaking engagements," says Dent. "I was doing over 200 a year, and that's too much." He recently launched the Dent Advisory Network, which licenses Dent materials and the right to give investment seminars based on his work in particular territories.
The Dent brand branches out into investment management as well. The AIM Management Group launched the AIM Dent Demographic Trends Fund last June, and sales have been brisk. On Feb. 29, assets reached $1 billion. Dent's firm, H.S. Dent Advisors Inc., serves as subadviser to the mutual fund, giving AIM portfolio managers direction on significant demographic trends and what kinds of stocks should benefit from them. He leaves stock selection to the managers. So far, the fund is up 67.1% since its launch, vs. 3.1% for the Standard & Poor's 500-stock index.
Van Kampen Funds is in the act, too, selling more than $1 billion of the Roaring 2000s unit investment trusts--unmanaged portfolios of stocks based on Dent's work. So far, Van Kampen has launched a UIT in each of the last four quarters and is marketing a fifth one right now. Among the stocks in portfolio No. 5: technology stars Cisco Systems and JDS Uniphase; financial services companies Chase Manhattan and E*Trade Group; health-care companies such as Genentech and Medtronic; and multinationals like Anheuser-Busch and Procter & Gamble. The P&G holding, down 42% since the portfolio was launched on Feb. 8, is one reason why that trust is down 2.3%. That still beats the S&P 500. The oldest trust, launched on Mar. 4, 1999, is up 10.6%, vs. 9% for the S&P 500 during the same period.
FAINT ECHO. As with the mutual fund, portfolio managers choose the stocks, but Dent makes his opinions known, too. "One trust had Disney, but I asked them to take it out," he says. "Disney's main business is slowing demographically. We're past the peak of the echo baby boom, and those kids aren't as interested in Disney anymore. It's the same reason toy companies and cereal makers are having a tough time right now."
The empire is unusual. Speaking fees, book royalties, seminar materials, and other publication revenues go to the H.S. Dent Foundation. "I want to build a foundation that can be a venture-capital unit for nonprofits," says Dent. According to the foundation's Internal Revenue Service filings for 1998, the latest available, Dent took a $30,000 salary as president. For the year, the foundation had $1.7 million in revenues, the bulk of it from speaking fees, and $1.5 million in assets.
By training, Dent is more of a management consultant than investment guru. After graduating from Harvard Business School in 1979 (he was a Baker Scholar, meaning that he was in the top 5% of the class), he went to work for Bain & Co. "As a consultant, you analyze trends to figure out where a business is going, and you have to understand demographics to do that," says Dent.
After a few years at Bain, he set off on his own, doing consulting and strategic planning for small companies--and dug deeper into demographic research. In those years, he made the connection between the stock market and population trends: "Plot the two, and it looks like the same chart, with a 45-year lag." That was his epiphany. In the late 1980s, the first members of the huge baby boomer generation were just beginning to hit their 40s, which he figured would have major implications for both the economy as a whole and the stock market. In fact, when he wrote The Great Boom Ahead in the early 1990s, "I wrote it for corporate executives, but they didn't pay attention," says Dent. "Financial advisers [brokers and financial planners] responded to the book and its message."
Indeed, few were predicting Dow 10,000 in the early 1990s, when the U.S. was still shaking off a recession and the stalwarts of U.S. industry were downsizing and slashing into management ranks. The U.S. budget deficit peaked at $290 billion in 1992, and Dent's talk of budget surplus at the time--a by-product of the robust economic environment the boomers would produce--seemed far-fetched.
By the latter part of the 1990s, as the economy and the bull market built a head of steam, Dent's following grew. "Harry's explanation of the stock market is a simple one that resonates with investors," says Dan Waldron, a vice-president for Van Kampen's UIT group. "That's why we started the UITs based on his work."
Sure it's simple, and it seems reasonable enough. But is it too simple to explain something as complex as the stock market and the economy? What about the vast technological changes that have taken place during the last few years? And what about globalization? "There are so many other things going on that you can't explain the stock market by demographics alone," says Robert J. Shiller, a Yale University economist. Adds economist James Poterba of Massachusetts Institute of Technology: "There are changing patterns of consumption, earnings, and labor market activity, all of which will have an impact on the economy and the stock market." But such criticism doesn't faze Dent. "Economists have been dead wrong for decades," he says.
GO SMALL. While Dent is a stock market bull for most of the decade, he does have favorite sectors--technology, health care, financial services. "All benefit from the aging of the boomers," he says. "But if you were investing now, I'd go a little heavier on financial services because they're cheap, and a little lighter on technology, because they aren't." He expects small-cap stocks to outperform large-cap ones for the next couple of years, but large caps will dominate through the rest of the bull market. Says Dent: "Large-cap growth stocks are the best able to take advantage of demographic trends."
Looking abroad, he recommends investing in Asia, where nearly every nation but Japan has market-friendly demographics. Asia, in fact, will continue to be on demographic upswing even after the U.S. economy heads south later in the decade.
For now, says Dent, the sell-offs are just buying opportunities to carry investors through the next eight years. He's betting that 80 million boomers can't be wrong.