Streetwise: Patience, common sense yield profits
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The world looks brand-new," said Hobbes. "A New Year ... a fresh clean start," said Calvin. "It's like having a big white sheet of paper to draw on," said Hobbes. "A day full of possibilities," said Calvin. "It's a magical world, Hobbes old buddy ... let's go exploring."
Bill Watterson wrote those words in December 1995 as he concluded the last of his "Calvin and Hobbes" comic strips. Every year since then I open my first column of what will soon be a new year by quoting that phrase because the message is so abundantly clear. The financial markets are analogous to Calvin's magical world ... full of possibilities. All that remains is for you to go exploring.
Looking back on 2012, the financial markets have done well, despite the seemingly never-ending uncertainty derived primarily from congressional antics and the uncertainty generated by the fiscal cliff. Going into the last few days of 2012, the Dow Jones industrial average is up 7.7 percent, while the S&P 500 had climbed 13.3 percent. The Nasdaq Composite performed the best of the three major indices, rising 21 percent.
While historical data have their place, that is not what is at issue here. Rather it is what you are going to do going forward that counts. And despite what you may have been told, investing in stocks has been and always will be the greatest wealth builder of all time.
If you are apprehensive as to your ability to adroitly invest in today's market, take heart. Common sense, combined with a modicum of patience, will often produce annual gains of 11 to 15 percent. Nonetheless, there will be times when stochastic events of an exogenous nature will take their toll, at least temporarily. That is the nature of the beast.
Now wait a minute, you say. Can a mere mortal really be successful in today's investment environment? Absolutely. The only real damage comes from panic-induced selling. Therefore, transfer your attention away from the continual prognostications of what might happen and instead concentrate on how to best allocate your investment resources.
With stock prices still relatively low, your investment risk remains manageable with an ongoing opportunity to achieve substantial gains going forward. No, I am not going to be so rash as to try and predict Wall Street's financial future. Without the late Madam Marie of Asbury Park and her crystal ball, that would be futile. Nonetheless, here are some tidbits to consider.
The Fed has made it abundantly clear that interest rates are likely to remain at their current low levels, through 2013 and probably well into 2014. The Fed is also continuing its latest quantitative easing program. Inflation is benign and the financial markets are forward-looking indicators, meaning that Wall Street tries to anticipate events four to six months out.
The difficulty is that consumers account for 70 percent of the nation's gross domestic product, meaning that consumers have been carrying the economic load, despite stagnant income growth. This was made possible by a continual increase in the amount of debt held.
As the recent holiday retail shopping made abundantly clear, the average consumer continues to reduce debt. Therefore, either corporate investment or government spending must take up the slack; except that corporations are also deleveraging, while various austerity measures have reduced federal and state spending, thereby creating quite a conundrum.
Meanwhile, you can look forward to being inundated with market forecasts of every description. Many will try to conjure up a primordial fear of Wall Street but offer salvation if you immediately subscribe to this or purchase that. Do not to fall sway to the passions of the market, the tenets of its prognosticators or those selling new and improved versions of snake oil. Instead, consider the words of Wall Street legend Lucien Hooper.
"What always impresses me," he once wrote, "is how much better the relaxed, long-term owners of stock do. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional."
Therefore, relax and have a healthy, happy, and safe New Year.
First Published December 30, 2012 12:00 am