The media and pundits seem at times to act almost as shills and casino hosts encouraging players to pick up the action and move the money around looking for a win. The constant discussion of short term events that have little to no bearing on the long term goals and objectives can knock the most disciplined investor off their game.
The only two things that really matter to an asset based value investor are price in relation to value and margin of safety.
Nothing else, no matter how worked up the talking heads may be at various times of the trading day.
Some of the things that are seriously pondered and considered during the day border on the ridiculous. Right now the talk of the day every day focuses on the Fed taper. Traders and money managers wax eloquent about the timing and pace of the Fed's winding down of their bond buying program.
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The market is addicted to quantitative easing programs and the program has been considered by many to be the driving force behind this year's market rally. It seems everyone has an opinion and shockingly they seem to be willing to bet real money on the timing and the outcome of the taper.
We know the Fed is going to have to taper their purchases.
This cannot go on forever and they have telegraphed their intentions to do so sooner rather than later. It might start next week, or next month or sometime after Janet Yellen takes control. No one outside of the Federal Reserve building knows exactly when and confident predictions of timing border on the ludicrous. Even more important is that no one knows how the market will react to the announcement.
The consensus is that the taper will cause interest rates to rise and stocks to fall. A lot of people are betting that this is the case, and we saw some big outflow for both equity and bond funds in the past few weeks as a result of taper fears.
Of course the consensus was that stocks would fall during the budget-related government shutdown but it never happened.
The consensus was that the President getting reelected would trigger selling in the markets but it never happened. I am hard pressed to think of a time when the consensus was correct about how the market would react to an event.
Whatever happens when the Fed announces they will slow bond purchases the correct strategy for long term investors is to react what the markets does, not bet on what it might do. If we get a huge sell off in stocks that creates additional inventory of cheap stocks with an adequate margin of safety then we should be buyers. If we see a big consensus killing rally and issues we hold rise to a level above their full value as a business we should sell our shares. If we just muddle along and there is no sustained meaningful reaction we should go read a book and ignore the short term noise.
The other huge source of noise at this particular moment in time are the 2014 predictions.
Strategists and gurus are on TV confidently predicting what the stock market, economy and interest rates might do in the year ahead. They make very precise estimates of what the S&P 500 companies will earn and then assign and exact multiple on that number based on their forecasts for economic conditions and interest rates. Anyone who takes these forecasts seriously and invests their money based on the ridiculous forecasts is something of a fool and deserves to lose their money. None of that is knowable in advance and is simply a guess dressed up in pretty clothes.
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Looking at the markets as a long term value investor here is the only prediction that matters At various points in time markets will get panicked by some event, be it political or economic in nature, that causes sustained selling and a large number of bargains will be created.
You will be able to buy a lot companies for less than their asset value with a huge margin of safety.
When this happens you should be a buyer of shares. At other times the market will get overly excited for a period of time and stocks will sell well above any rational valuation of the underlying business. When that happens, you should be a seller of stocks. Sometimes the markets will not really do much of anything at all and at those times you should hold safe and cheap stocks and also not really do much of anything at all.
There are only two questions that matter to an asset based value investor. Is it cheap? Is it safe? Everything else is just noise.
Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on RealMoney.com, DailySpeculation.Com as well as several print publication including Active Trader and the Wall Street Digest. Learn which 3 low risk, high yield stocks Tim owns for the trade of the decade.