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One Popular Investor Obsession You Should Give Up Right NowBy
Wednesday, September 12, 2012
Today, I'm going to teach you one of the hardest lessons for investors to learn...
It's worth it to try, though. That most investors will never learn this concept gives those of us who do a huge advantage now and forever.
It may come as a shock, though... You may find it very hard to believe... But it's key to the success of some of the world's most successful investors...
Gross domestic product (GDP) growth and stock market returns have just about nothing to do with one another. In fact, you can achieve great investment results without ever thinking about another "macro" issue again.
Most people base their investing decisions on economic data, forecasts, and what they hear in the media. They obsess over unemployment numbers... the Producer Price Index... housing numbers... interest rates... factory orders... industrial capacity utilization... the Baltic Freight rate...
But the wisest, richest investors in the world say to forget it.
Business partners and billionaire investors Warren Buffett and Charlie Munger, for example, have been investing their own and other people's money for 47 years. And in all that time, they claim they've never had a single conversation about the economy. They simply don't waste time on it.
The vice chairman of investment firm Fidelity, Peter Lynch, is one of America's top money managers. He says if you spend 13 minutes thinking about economic and market forecasts, you've wasted 10 minutes. It's just not worth thinking about.
Ben Inker of the money-management firm Grantham, Mayo, and Van Otterloo recently wrote an excellent paper demonstrating there's no meaningful correlation between GDP growth and investment returns.
In other words, stock market investors who think it's important to worry about where the economy is headed are simply dead wrong. Every minute you spend worrying about macro data has zero value to you as an investor.
It's hard to remember this, though.
Everywhere you look, the financial news media are constantly trying to connect the two. They're obsessed with pretending to know what you should buy and sell based on all the economic data pouring out of governments, Wall Street banks, and talking heads every day. But it's all useless noise. Most of that economic news has little value at all for investors.
Instead of worrying about all that, stick to studying great businesses.
Stocks like Wal-Mart (NYSE: WMT) and McDonald's (NYSE: MCD) thrive in recessions as consumers pinch pennies. Consumer-products giant Procter & Gamble steals market share from its competitors during tough times because it has enough cash to maintain its advertising. In 2009, Berkshire Hathaway used its enormous cash hoard to make incredible deals with cash-strapped firms who couldn't access credit anymore.
For every great business like these, there's somebody who thinks a macro wind will crush it. He has failed to learn one of the greatest lessons anyone can learn, if he seeks riches in the stock market: Great businesses are great because they can ride out and even exploit macro problems.
Great businesses aren't cyclical. They don't get better or worse with the economy. They stay profitable and continue to gush free cash flow and pay higher dividends every year.
If you focus on buying great businesses, you can turn down the volume on cable news' fretting about Europe's debt, Obamacare, and the Fed's latest pronouncement.
You probably don't believe it... I get reader feedback indicating many folks refuse to stop obsessing about economic and political problems. They just don't get it.
What's a fella to do? It's my job to show you the way, to help you become a better investor. But lots of folks don't seem to want to hear it. Instead, they let the market guide their investing decisions time and time again... And they miss out on some great investing opportunities.
I'm not saying you should never read another newspaper. By all means, know what's happening in the world. Understand the backdrop in which you're investing. But don't waste a minute trying to figure out what stock to buy based on economic reports and forecasts.
Don't let macro fears prevent you from buying great businesses and compounding your wealth with great stocks.
Good investing,
Dan Ferris
Further Reading:
Some of the world's greatest businesses are also the most "boring." But they are the ultimate safe-haven in today's volatile market. "If you want excitement, go to Las Vegas," Dan says. "If you want to make money, invest in boring businesses that dominate their industries and pay higher dividends every single year." Learn more here.
Dan recently tipped readers off to one phone call every investor should make. "I'm not talking about the numbers you see on late-night infomercials for 'get rich quick' investment strategies," he writes. "In five minutes, you can put one of the universe's most powerful forces to work for you. You just need to dial that number." Get the full story here: The One Phone Number Every Investor Needs to Know.
Market NotesAMERICA'S FINANCIAL BACKBONE IS STRENGTHENING Last month's rally was so strong, it even pushed up bank stocks. And that's good for America.
Regular DailyWealth readers know we monitor XLF, the big U.S. financial stock fund, to gauge the action in the banking sector. With large weightings in JPMorgan, Bank of America, Goldman Sachs, and Citigroup, XLF represents the backbone of the U.S. financial system. It rises and falls according to America's ability to earn money, save money, service debts, start businesses, and generally just "get along."
Like most assets, XLF was hammered in the summer 2011 selloff. Shares plunged 26% in just over a month. The fund then rallied with the rest of the market... and then declined with the market in May.
But as you can see from the 15-month chart below, XLF has rallied off its summer lows... and is now a chip shot away from a new 52-week high. All in all, America's financial backbone is strengthening... and that's a good thing.
– Brian Hunt
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