The Fortune Seller

Harry S. Dent Jr. might be the best-known forecaster ever, save for Nostradamus. But are all those "greatest boom" predictions actually worth anything?

Harry S. Dent Jr. is one of the most famous stock market forecasters anywhere. True, his every prognostication, doled out in newsletters or given during speeches to brokerages around the country, doesn't move markets the way, say, an Abby Joseph Cohen directive does. Nevertheless, he is a major celebrity among retail financial advisors. The spines of his best-selling books, including his latest, “The Roaring 2000s,” can be seen on brokers' office shelves across the U.S. and Canada. So famous is he — it helps that in a 1992 book he correctly predicted the Dow would strike 10,000 before the decade's end — that his speaking fees approach $50,000 — up in Guiliani territory. An hour-long conference call can cost $10,000 or more.

Dent, with a Harvard MBA and a two-year stint at Bain & Co., built an empire that would make any Wall Street strategist weak with envy. His demographics-based predictions for the future are really quite simple. It can be reduced to this: Baby boomers' consumption habits drive the economy. And with the baby boom generation now reaching “its peak productivity, earning and spending years,” combined with the “emergence of their radical information revolution into the mainstream of our economy,” we are on the verge of the “greatest boom” in history, Dent states in “The Roaring 2000s.”

The boom should catapult the Dow to “at least” 21,500 and possibly as high as 35,000 by the year 2008, he states.

It's not surprising then that with such bullish predictions, Dent has sold millions of books, and spawned a nonprofit foundation that in 2000 (the latest year for which figures are available) took in nearly $3 million. The H.S. Dent Foundation has $7.7 million in assets, which he uses to “help people understand change,” as the foundation literature says.

“Dent is a marketing genius, and he's a great speaker. So he's been able to really promote himself,” says Sacha Millstone, a long-time Dent fan and senior VP of investments at Raymond James. It was not uncommon for brokers to send clients Dent's books as presents. Even folks who had never read one of his books knew of his consumption peak theory. And the man himself met the increased thirst for all things Dent with a variety of products, including training seminars, CD-ROMs, videos, charts, polo shirts and marketing sessions to train brokers to “spread the Dent gospel,” as he puts it.

Another sign of his popularity? He has become a key marketing tool for other organizations. He is a part-time advisor to the AIM/Dent Demographic Trends Fund, with about $850 million in assets ($1 billion if you include the Canadian assets), and The Roaring 2000s Portfolio, a Van Kampen Funds unit investment trust series that seeks to “leverage the many demographic, economic and lifestyle trends that are predicted to occur over the next 10 to 15 years, according to Harry S. Dent Jr.,” says offering literature dated March 2002. He does not actually pick stocks or have any formal responsibility in the management of the funds or the UITs, according to AIM and Van Kampen.

“I probably talk to him once or twice a month,” says Lanny Sachnowitz, manager of the AIM/Dent Demographic Trends Fund. The Van Kampen UITs, like all UITs, are passively managed for a set period of time after the investments are picked by Van Kampen management.

Dent doesn't tell you which individual stocks to buy, but only which sectors in which to fish (technology, telecoms, multinational consumer companies, healthcare, including big pharma and biotechs, and financial services companies). Van Kampen consults Dent for sector weightings. But for AIM, it's looser. “We just consider his guidance and try to marry the top-down forecasting with our bottom-up stockpicking [style],” says Sachnowitz.

The Trend Is — er, was — Your Friend

Not everyone is a fan. Economists and demographers regard him less an oracle and more a Martha Stewart figure: a skillful salesman marketing common sense with questionable practical use. But even they agree that Dent is a valuable tool for asset gathering. He gives brokers patter to close new accounts or talk people off the window ledge.

The AIM/Dent fund, like all AIM funds, is sold only via financial intermediaries. It was launched in the summer of 1999, and swelled to nearly $2 billion at its height. Because it is a growth fund investing in Dent's favored “new economy” sectors, it had a pretty rough year last year — dropping by 35 percent after maximum fees. Capital depreciation combined with lackluster new sales — the fund has just $850 million in assets. (Since inception in 1999 through March 31, the fund was down 22 percent, according to Morningstar. That's about 200 basis points behind the large-cap growth category average.)

At press time, Van Kampen hadn't provided details about the performance of its Dent UITs, other than to say that, given their new economy focus, the UITs probably hadn't been rewarding investments.

Brokers still find Dent useful in helping clients pick stocks. Says Dent, “Our techniques caught on in the brokerage industry because brokers have to explain economic changes to and talk with their clients about their long-term goals.”

“It makes a great deal of sense to my clients,” says Richard Wilson, who advises around $85 million at RBC Dain Rauscher in Richmond, Va. (formerly Branch Cabell). “I am struck by the simplicity of the argument. It's not some highly complex mathematical model that will earn someone a PhD. It's straightforward.” And, he adds, the logic helps keep clients invested when the markets are soft, such as now.

Of course, the logic was an even stronger sales tool on the way up. Says a New York-based Salomon Smith Barney broker: “When the market was going up, when we all needed some ammunition, Dent was convenient. He was building a bullish story and a bullish story was what we were building.” He adds, “Now, I think many of us have forgotten about him.”

Actually, with the market limping along, brokers still make liberal use of Dent's bullishness. They reprint his charts, offer his arguments and quote him liberally, brokers say, even if they do not follow Dent's actual investing advice. Marketing guru Bill Good and Dent together have launched the H.S. Dent Adviser's Network, “an elite group” of brokers, according to a Bill Good Web site, with 200 members in North America. And Dent also advises GoldK, a full-service, Internet-based retirement company that Dent has helped finance through his H.S. Dent Foundation. As a John Hancock Funds marketing executive in the early 1990s, says Troy Shaver, now with GoldK, “Our goal was to put [Dent's] Age Wave mountain chart in virtually every brokerage office in America. We gave away tens of thousands of those charts, and then other people picked up on that.”

Accurate Prognostications or Luck?

While Dent has shown that he and his basic ideas have resonance with retail investors, investing pros are not so bullish on his analysis. Sure, he nailed the 1990s bull market, and that can't be taken away from him. But it's hard to see any practical stockpicking value, says Morningstar analyst Bridget Hughes. “You can say just about anything can benefit from the baby boomers getting older and be right,” she says. She calls the AIM/Dent fund “just a gimmick, putting a best-selling author's name on it. It has been a subpar performer.”

In practice, it's hard to take Dent's top-down trend predictions and exploit them for capital gains, says Bill Sherden, author of “The Fortune Sellers: The Big Business of Buying and Selling Predictions.” “If you want to predict the future direction of the stock market, you're probably better off flipping a coin.”

Core to the Dent philosophy is that economic health can be predicted by looking at the birth index with a lag of 46.5 years, since that age is when the average American hits their peak for earning and spending. It would follow, then, that when a large portion of the population is near this age, production and consumption, and therefore, many stocks, would rise.

Not necessarily, says MIT economic professor James Poterba. He argues that there is no conclusive evidence that demographics fuel stock returns at all. “There simply haven't been enough observations,” he says. Poterba studied price fluctuations in stocks and bonds over a 70-year period. He compared those changes to population trends, and Poterba found that the ups and downs in the number of people old enough to invest was a poor predictor of swings in the price of financial assets. “The results suggest little, if any, relationship between demographics and asset returns,” Poterba says.

“The aging baby boomer demographic trends makes for a terrific sales pitch,” says Peter Francese, founder of American Demographics magazine [also owned by Primedia, publisher of this magazine]. “But it has little predictive value on which companies to invest in.”

Those Unpredictable Baby Boomers

For starters, buying habits are hard to predict even five years out, let alone 10 or 20. Fads come and go, and economic behavior of any demographic changes over time. More important is figuring out which companies are the best managed, have the best profit margins, the weakest competition, etc.

Francese also adds that baby boomers are a heterogeneous group, so it's hard to make any sweeping generalizations about them that an investor could exploit. “It really bothers me when I hear anybody talk about a demographic group as being the savior of the western economy.” The demographic data uses then? “You can sell stock with it. This is the point.”

If Dent's aging thesis were true, then hospital stocks would have been a great investment. But largely, Francese says, they have not been. “You would have lost a fortune over the last 20 years.”

“I'm not taking anything away from Mr. Dent,” Francese says. “But in this case, any investor or mutual fund manager should be smart enough to know that demographics are worth looking at but it's not a major factor, and in many cases, not even a minor factor, in whether or not a specific company is a good idea. There are forces at work that are vastly more important.”

Dent Idea Box

The health of the economy is predictable by looking at the birth index with a lag of 46.5 years.

The 45- to 54-age range is the peak for earning, spending, savings rates and stock investments for individuals. By then, the average American has purchased their largest home, all furnishing and their children are now teenagers. Expect the stock market to perform best as baby boomers move into this age range.

Abrupt emergence of information technologies coincides with the peak spending years of the baby boomers, bringing with it “a new era of prosperity and sweeping changes.”

In 2009, the economy will enter into a deflationary period and depression that will last until 2023. Bonds will be the best investment.

Over the next 30 years, a larger number of people will move from the suburbs and cities to rural areas and small towns, thanks to decentralizing technologies. Look for money-making opportunities in “exurb” real estate.

From late 2002 until 2008, invest in large-cap stocks and mutual funds, with heavy weighting in technology, finance, international and healthcare.

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