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Tuesday, March 6, 2012
The key to investment success is not a technique or a strategy.
It's not position sizing, trailing stops, options, having inside information, or owning World Dominators. It's not even the ability to value a business (a skill without which you're virtually guaranteed to lose money in stocks).
The key is not "buy low, sell high," or "be greedy when others are fearful and fearful when others are greedy"... though both adages will certainly help.
The key to investment success is a simple, powerful truth.
It's the reason U.S. stocks appreciated 1.5 million percent during the 20th century. It's the reason great investors are great... And it's the reason you can set yourself up for the biggest, safest gains the market has to offer.
You see, understanding this truth is what allows you to buy when stocks are down and everyone is scared... and sell when stocks are overvalued and everyone is complacent...
To succeed in the stock market, you must believe that shopping trumps politics...
That's the simplest (and maybe the crudest) way to say that what happens in the business world is more important to your daily life and the daily lives of everyone in America than what happens in the White House or the Capitol.
The amount of shopping for hamburgers at McDonald's is more important than the debt ceiling debate. The amount of shopping for beer at the local convenience store is more important than any contest for the Republican presidential nomination. And the number of shoppers occupying the aisles of Target and Wal-Mart is more important than the number of protestors occupying Wall Street.
Save your hate mail. I already know what you're thinking...
"Dan has lost his mind. Politics is everything to investors. America could be ruined with so-and-so in the White House... and with so-and-so running Congress."
In reply to this phony concern, I ask you to remember the 20th century... The panic of 1907, Prohibition, the income tax, the founding of the Federal Reserve, the Great Depression (in which half the country's banks failed), World Wars I & II, the outlawing of gold, the Korean and Vietnam Wars, oil shocks, the end of gold-backed U.S. dollars, the great inflation of the 1970s, the market crash of 1987, the savings and loan debacle and recession of the early 1990s, and the Internet bubble and crash in 2000...
Some of those things scared the hell out of investors. But you'd have made a lot more money if you bet against them lasting forever and for the primacy of commerce.
Despite all the horrible things that happened in the 20th century – despite it being the deadliest century in history (in terms of lives lost) – U.S. stocks... as tracked by Dimson, Marsh, and Staunton in their excellent book, Triumph of the Optimists... appreciated about 1.5 million percent.
If you want an idea that'll help you cut through the noise and make great, winning bets when everybody else is throwing up, this is it. Knowing that the Dow Jones Industrials' value was highly unlikely to be permanently impaired would have helped you scoop up those businesses near the bottom in late-2008/early-2009. The Dow is up more than 100% since its early-2009 bottom.
Opportunities to appreciate the importance of business over macroeconomic issues abound in the roller coaster that is the market. For example, take the European crisis today... I can hardly think of a noisier event.
Yet, Warren Buffett is buying European stocks. That's right. The chairman and CEO of Berkshire Hathaway – and one of the richest men in the world – recently put about $1.9 billion of Berkshire's money into eight European stocks. (Sorry, we don't get to know which ones he bought. Buffett hasn't disclosed their names yet.)
During a special, three-hour TV appearance last week, CNBC's Becky Quick asked Buffett why he bought those eight stocks. His answer shows how the primacy and dynamism of business trumps the relatively static, less-important business of government...
Notice the words, "...something else that's bothering the world." That's the stuff that terrifies the herd out of being able to make money in stocks... and has made Buffett a $43 billion fortune. Buffett effortlessly looks past the crisis in Europe and focuses instead on the fact that those eight businesses were "terrific companies that were cheap."
He's telling us what's most important to us as investors... owning a terrific company that's cheap and will still exist five, 10, 20, even 50 years from now is far more important to you as an investor than the European crisis, or any other government-created crisis, regulatory regime or tax scheme.
People will continue to drink Coke, use computers, and buy necessary household goods at a reasonable price. Buffett knows this as well as anyone. That's why he owns big stakes in Coke, IBM, and Procter & Gamble, among others, in his holding company, Berkshire Hathaway. (And Berkshire itself happens to be a great buy at these levels.)
I'm sure there are folks out there – perhaps even readers of this publication – who are out of U.S. stocks permanently because they believe the U.S. is going straight to hell in a handbasket. It's not true. Yes, we have problems, many caused by goofy politics... But they're no match for the vigor of the marketplace. Shopping trumps politics. Business trumps politics.
Read more from Dan here...
Investing in these types of companies will help you beat the overall market... and with less risk.
"Beginners often jump in and out of stocks based on one or two days of price action. They lose money. And they get frustrated. Don't be one of them..."
If you take this lesson to heart, you're virtually guaranteed to make money over the long term.
TAKING THE "LONG VIEW" OF THE STOCK MARKET
Today's chart puts the market "correction" warnings you're hearing into perspective.
Since mid-December, the benchmark S&P 500 index has rallied 12%. While that may not sound like much at first glance, realize that it's a huge move in such a short time for the index.
This "huge" move has many smart traders warning of a correction. Remember, markets are like runners. They can't sprint all out for miles without taking a "breather." A breather is what many contrarians are expecting right now. But should that correction come, it's worth keeping the "long view" in mind...
Below is the performance of the S&P 500 over the past three years. As you can see, stocks enjoyed a huge rally off their 2009 crisis lows. Since then, stocks have put together a big bullish series of "higher highs and higher lows." It's a trend the great trader Ed Seykota would say he could see from across the room. So… sure, stocks are due for a correction. But considering that the big trend is up, we'll consider it a buying opportunity.
In The Daily Crux