I don't know where the broader market goes from here, and neither does anyone else. However, I don't predicate my success on my ability to predict the future. Rather, my success hinges on my ability to save more than half of my net income on a regular basis, buy high quality companies at reasonably attractive valuations with the excess capital derived from my savings and then monitor the portfolio with some regularity. Boring, right? Yep. But boring is good.
One of the more appropriate tools I've yet run across to value the broader market is the Shiller P/E Ratio. The Shiller P/E, developed by Yale economist Robert Shiller, is an inflation-adjusted average of the last 10 years of earnings. Right now, the Shiller P/E stands at 25.28 - well above the long-term mean of 16.5. Therefore, on that basis long-term equity returns from here are likely to be lower than long-term averages. But who knows, really? Certainly not I.
What do I know? I know to focus on what you can control.
You can't control what the stock market does. You can't control when the Federal Reserve finally decides to taper QE. You can't control what happens in China, or Washington D.C. You can't control the inflation rate, the unemployment rate or exchange rates. You can't control when and where war breaks out, the price of oil or the weather.
However, you can control how and where you spend your capital. You can control your expenses to a degree, and therefore your own debt levels. You can choose to invest only in high quality companies with long histories of operational excellence bearing strong track records of rising revenue, earnings and dividends. You can control the reinvestment of your dividends back into these high quality companies. You can choose to ignore the noise and stick to your long-term goals one day at a time. You can choose not to be a slave to the 24-hour newscasts that pervade your life. You can control your inner fear and greed if you really want to.
I believe in financial independence, and I believe it's attainable for most everyone that aims for it. I believe instaying persistent though the peaks and valleys in life. I believe in perspective and being grateful for what you already have in life.
But what does all of this mean?
It means to ignore the headlines. Stay focused on the long term. Yes, the DJIA is breaking records. But what does that have to do with The Coca-Cola Company's (NYSE:KO) ability to continue selling Coke Zero, Dasani or Simply Orange? Does the DJIA at 16,000 or 12,000 have an impact on Johnson & Johnson's (NYSE:JNJ)marketing and sales of Listerine or Benadryl?
Focus on what matters - companies and their performance. Value companies on a fundamental quantitative and subjective qualitative basis, using future cash flow or dividends discounted back to today to arrive at a reasonable valuation and make your purchasing decisions from there. Focus on high quality. Focus on the likelihood of a company being able to continue doing business for decades to come. Inspect and monitor cash flow statements, balance sheets, income statements, annual reports and 10-K's, not the latest headlines on yield curves, quantitative easing or gold prices. Think about what the common stock prices on the companies you're interested in or already own will be 10, 20 or 30 years from now. Does it matter ifMcDonald's Corporation (NYSE:MCD) shares fall from $99 per share to $97 per share today on weak same-store sales growth if MCD is priced at $400 per share 20 years from now?
Yes, the DJIA closed at a record-breaking number today. But I barely noticed because I'm too busy focusing on the things that matter: living below my means and investing in high quality companies for the long term. The financially independent me of 10 years from now will be glad I'm focusing on the things I can control and the things that matter.
How about you? Focusing on what you can control?
Full Disclosure: Long KO, JNJ, MCD
Thanks for reading.