Market Mantras

“It’s what you learn after you know it all that counts.”

. . . Earl Weaver

Now is the time of year when strategists, economists, gurus, etc. all join in on the annual nonsense of predicting “What’s going to happen in the markets for 2017?” For many, this ritual is an ego trip, yet as Benjamin Graham inferred, forecasting where the markets will be a year from now is nothing more than rank speculation. Or, as we have noted, “You might as well flip a lucky penny.” Manifestly, while forecasting is fun, it should in no way be construed to be investment advice. That is why we try hard to avoid the annual guessing game and attempt to focus on what the markets are “saying,” what sectors look favorable, and what stocks we want to own in the new year. This year we have made an exception to that strategy, because our new friends at Alex Brown want a price target for the S&P 500 (SPX/2238.83) in 2017. In past missives, we have explained why our price target for 2017 is 2450. However, typically when “pressed” for a prediction, we tend to look at where the SPX is currently trading and state, “The average yearly return for the S&P 500 since 1926 has been ~10.4%, so we think it will be up 10.4% in the new year. Surprisingly, a 10.4% gain in 2017, from where the SPX currently resides, is very close to 2450 (2238 + 232=2470).

That said, lost in the “noise” of the annual soothsaying contest are some simple tenets of investing, with one of the best examples published in The Financial Analysts Journal in 1995. It was penned by Arthur Ziekel (at the time head of Merrill Lynch Asset Management) as a letter to his daughter on investing. To wit:

“Personal portfolio management is not a competitive sport. It is, instead, an important individualized effort to achieve some predetermined financial goal balancing one’s risk-tolerance level with the desire to enhance capital wealth. Good investment management practices are complex and time consuming, requiring discipline, patience, and consistency of application. Too many investors fail to follow some simple, time-tested tenets that improve the odds of achieving success and, at the same time, reduce the anxiety naturally associated with an uncertain undertaking.

I hope the following advice will help:

A fool and his money are soon parted.

Investment capital becomes a perishable commodity if not handled properly.

Be serious. Pay attention to your financial affairs. Take an active, intensive interest. If you don’t, why should anyone else?

There is no free lunch.

Risk and return are interrelated. Set reasonable objectives using history as a guide. All returns relate to inflation. Better to be safe than sorry. Never up, never in.

Most investors underestimate the stress of a high-risk portfolio on the way down.

Don’t put all your eggs in one basket.

Diversify. Asset allocation determines the rate of return. Stocks beat bonds over time.

Never overreach for yield.

Remember, leverage works both ways. More money has been lost searching for yield than at the point of a gun (Ray DeVoe).

Spend interest, never principal.

If at all possible, take out less than comes in. Then, a portfolio grows in value and lasts forever. The other way around, it can be diminished quite rapidly.

You cannot eat relative performance.

Measure results on a total return, portfolio basis against your own objectives, not someone else’s.