Dr. Strangelove or: How I Learned to Stop Worrying and Ignore Mr. Market
- Feb 06, 2007
- admin
- Investing
“I heard the talk of a soft landing, and I remember joking with people and saying, Well, that will be one in a row.” — Treasury Secretary & former Goldman Sachs Chairman Hank Paulson
Charles Dickens classic novel “A Tale of Two Cities” commences with the famous words: “It was the best of times, it was the worst of times,”prose which not only aptly describes 19th century France, but also the current stock market as we enter 2007.
On the bullish side, money is still cheap by historical standards, global growth is still relatively strong and P/E ratios have not become absurd. Since we’ve heard the bull argument non-stop for the past four years I won’t bore you with details, however these are all good reasons to stay fairly optimistic.
On the bearish side of the debate however, the collapse of the housing market cannot be understated. 88% of the time housing starts to drop by 20% or more, (which it has), recessions are sure to follow.
And the global growth that has lifted all boats in the water during the past four years has begun to produce credible signs of inflation in producer prices (the prices companies pay to buy the supplies they need to create and sell products to us).
Usually, if producers/companies are paying more that means that consumers like us end up paying more as well.
Perhaps even more disturbing has been the tightness of the labor market. Labor costs represent 66% of the price it takes for a company to make the products they sell to us. For example, if you purchase a new IPOD, 2/3rds of the price you will pay represent labor costs.
As much as we all love having jobs and seeing our friends get jobs, it’s not good if the prices we have to pay for these products keep increasing because of the higher labor costs associated with a tighter job market.
If part of the picture looks bullish and the other part looks bearish, where does that leave us?
Exactly where we want to be.
Dr. Strangelove or: How I Learned to Stop Worrying and Ignore Mr. Market
If you only take one single lesson from your entire experience with me
make it this one:
No one, (myself included), can accurately predict the direction of the stock market, interest rates, the U.S. dollar, the economy nor any other macro-economic factor which pundits and other experts spend all day speculating about.
Sure, some lucky people get it right once in a while. But the reality is that no one can accurately predict the future of America’s macroeconomics for extended periods of time.
(And so far, neither can computers: all the programmers I know creating the “black-box” systems buried deep within the ground at the major brokerages still chuckle when I ask them if they’re getting any closer.)
The good news is that we don’t have to be able to predict, say, the direction of the market, to make money as investors. In fact, many of the world’s greatest investors (Templeton, Buffett, Lampert, Kerkorian, etc.) have suggested that even trying is a waste of time.
They unanimously agree that spending time on thoughts which are beyond their control distracts them from thoughts within their control, namely the study of individual companies.
A private businessperson, they argue, doesn’t care if October is usually a bad month for stocks: all he/she wants to do is to buy another business at a good price.
Why should we spend time focusing on anything else?
I endorse the same logic: all I care about when I buy a stock is which way it goes in the long-term – nothing else matters.
I bring this up today because I want to remind the newer members of our family (and there are many) to review my analysis and make your own judgments because there are no guarantees for success.
There are educated guesses and historical speculation.
As far as I’m concerned, predicting the direction of the market is nothing more then just a fun mental exercise that should be treated as such.
With that being said, let’s have some fun and begin “exercising.”
The Market “Handoff”
There is an old adage on Wall Street that says most people don’t know they’re even in a bear market until the market has already hit bottom. At that point they begin to sell.
Conversely, the old adage states that most people don’t know that they’re in a bull market until the market is at a top. It’s at that point that they begin to buy.
The point of the saying is that it can be very difficult to notice the beginning of a shift in the market. And yes, I do think that there is a “shift” happening in the market right now.
So what direction do I think this market is headed? It doesn’t matter, really.
That’s because I never make investment decisions based on where I think the market is headed.
Instead, I make investment decisions based on where I think individual stocks are headed and that should continue to serve us well as we plough through 2007!
Best Wishes for a wonderful and healthy and prosperous New Year,
Dylan Jovine