Stocks continued to retreat Wednesday despite a bipartisan agreement on Capitol Hill that looks likely to avert another budget crisis. The major averages ended near session lows, and they’ve now lost ground in seven of the last nine trading days. Apparently, the bulls need a breather. The Dow Jones industrial average (^DJI) fell 129 points, the Nasdaq composite (^IXIC) lost 57 and the Standard Poor’s 500 index (^GPSC) dropped 20 points.
Despite the broad losses, let’s start with a look at couple of big winners.
Mastercard (MA) rose 3.5 percent after saying it will split its stock 10-for-1, raise its dividend by 83 percent and buy back up to $3.5 billion worth of stock. Rival credit card company Visa (V) went along for the ride, also gaining 3 percent. But American Express (AXP) and Discover (DFS) both edged lower.
Gunmaker Smith Wesson (SWHC) rose 4 percent after earnings beat expectations on strong gun sales. But that didn’t benefit Sturm Ruger (RGR), which fell 2 percent. Smith Wesson shares have gained 29 percent over the past year — which coincides almost to the day with the Newtown, Conn., elementary school massacre.
And Groupon (GRPN) rose 1 percent after Wells Fargo upped its rating on the stock to ‘outperform,’ citing an improved mobile strategy.
On the downside, we have plenty to choose from.
Among the blue chips, Nike (NKE), UnitedHealth (UNH), and Pfizer (PFE) all lost more than 2 percent. Biotechs continued their recent struggles: Avanir Pharmaceuticals (AVNR) tumbled 29 percent after reporting a failed trial for its potential multiple sclerosis drug. Pharmacyclics (PCYC) fell 7 percent and Aegerion (AEGR) fell 4 percent.
LabCorp (LH), which conducts blood and other medical tests, could use an infusion after tumbling 11 percent. It issued a weak outlook for next year, putting part of the blame on Obamacare. Rival Quest Diagnostics (DGX) fell 5 percent.
What to Watch Thursday:
- At 8:30 a.m. Eastern time, the Labor Department releases weekly jobless claims and the Commerce Department releases retail sales data for November.
- At 10 a.m., Freddie Mac releases weekly mortgage rates and the Commerce Department releases business inventories for October.
These major companies are due to report quarterly financial statements:
- Adobe Systems (ADBE)
- Hovnanian Enterprises (HOV)
- Lululemon Athletica (LULU)
- Restoration Hardware (RH)
–Produced by Drew Trachtenberg.
Warren Buffett is a great investor, but what makes him rich is that he’s been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.
Most people don’t start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That’s unfortunate, and there’s no way to fix it retroactively. It’s a good reminder of how important it is to teach young people to start saving as soon as possible.
Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That’s really all there is to it.
The dividend yield we know: It’s currently 2%. A reasonable guess of future earnings growth is 5% a year. What about the change in earnings multiples? That’s totally unknowable.
Earnings multiples reflect people’s feelings about the future. And there’s just no way to know what people are going to think about the future in the future. How could you?
If someone said, “I think most people will be in a 10% better mood in the year 2023,” we’d call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.
Someone who bought a low-cost SP 500 index fund in 2003 earned a 97% return by the end of 2012. That’s great! And they didn’t need to know a thing about portfolio management, technical analysis, or suffer through a single segment of “The Lighting Round.”
Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return — still short of an index fund.
Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it’s not like golf: The spectators have a pretty good chance of humbling the pros.
Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time — every single time — there’s even a hint of volatility, the same cry is heard from the investing public: “What is going on?!”
Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.
Since 1900 the SP 500 (^GSPC) has returned about 6% per year, but the average difference between any year’s highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.
Someone once asked J.P. Morgan what the market will do. “It will fluctuate,” he allegedly said. Truer words have never been spoken.
The vast majority of financial products are sold by people whose only interest in your wealth is the amount of fees they can sucker you out of.
You need no experience, credentials, or even common sense to be a financial pundit. Sadly, the louder and more bombastic a pundit is, the more attention he’ll receive, even though it makes him more likely to be wrong.
This is perhaps the most important theory in finance. Until it is understood you stand a high chance of being bamboozled and misled at every corner.
“Everything else is cream cheese.”