“There will be time enough for countin’ when the dealin’s done”1
Many people view the stock market as more gambling than investing, which is easy to understand as the market seems to constantly have unpredictable gyrations both up and down. If you want to gamble on the stock market, you certainly can, and many people do, but there is another option.
Business school teaches you that the stock market is a discounting mechanism. In theory, the wisdom of crowds allows the stock market to anticipate the future and as a result, the stock market reflects what is about to happen, rather than what is happening. Reality, as you might guess, isn’t quite in sync.
In our view, market gyrations are merely a series of overreactions to events, sometimes too optimistic, other times, too pessimistic, but always willing to turn on a dime if a new tidbit of information appears. The market is only attempting to be efficient, but it is so efficient in the very short term, that it can be very inefficient in the longer term. Markets have seesawed back and forth projecting multiple rate cuts later this year to projecting no cuts at all. Eventually we reach the correct answer, but not without a lot of whipsaw action in between.
Here’s the problem. Traders are trying to play the whipsaw. Good luck with that. There are a few talented traders that seem to have a natural insight into markets, but they are few and far between. The financial news doesn’t help either. They need multiple stories every single day and that means that if we listen, we hear about every market move, no matter how insignificant. The world around us pushes us to focus on every insignificant detail, each and every day. The result is that the market looks like a casino, and if you focus on the market minute by minute, hour by hour, you are just another gambler at the casino.
For investors, the minute by minute, hour by hour market gyrations are just noise that serves to keep us amused. We pay attention because there are times when you have to “know when to hold ’em, know when to fold ’em, know when to walk away, and know when to run”1. But fundamentally, we don’t worry very much about whether another rate hike is coming or not. When we invest in stocks, we are buying a company, not a stock. We want to own companies that have proven to be stable and able to withstand economic adversity. We want that company to have a high return on capital and convert most of its net income into free cash flow. If they can do that, then the company’s value can compound at a high rate and we can earn a solid return, whether the Fed moves rate to 3% or 6%. That’s investing, not gambling.
Case in point – The Debt Ceiling
We’ve been saying on these pages that the debt ceiling issue is a political issue, not an economic issue and that the U.S. would continue to pay its bills. Allowing the U.S. to default is a sure way to get un-elected, so it is no surprise that more than enough Democrats and Republicans voted in favor of the measure. Those that didn’t vote in favor had the luxury of making a political statement at no cost. An agreement to raise the debt ceiling was never in doubt, it was just more noise.
1 From “The Gambler”, written by Don Schlitz; popularized by Kenny Rogers.
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Asset Allocation, day trading, Economic Growth, Interest Rates, Long-Term Investing, S&P 500, Stock Market, Stocks
By: thinkhouse