The Smart Way To Play This Market

Brian writes:

Now that financial stocks have cratered, homebuilders have been burned to a crisp, semiconductor companies have fizzled, and the Fed has shown itself to be clueless yet again, what do you think is the smart way to play this market?

I don’t like the phrase “play the market” to begin with, but really despise it when coupled with “this market.” It makes it seem like we need to adjust the way we invest based on what’s happening this second, which implies that this second is different than all other seconds. Neither is true.

I invest the same way regardless of what’s happening, and anybody worth anything in this business will tell you the same thing. If you’re still following the ever-increasing volume of market commentaries as if they’ll help you get ahead, you’re either a slow learner or wet behind the ears. The dime-a-dozen commentaries that clutter blog aggregation sites around the internet are so fickle that you might as well be getting your financial guidance from a kindergarten class that just finished a case of Twinkies.

Almost nothing matters to long-term results except earnings. Nothing will keep you safer at night and wealthier in the end than buying future earnings at a discount today. Patiently sifting through stocks and indexes for future earnings on sale is what I always do. I don’t stop doing it because some guy with a blog and a webcam snapshot of himself posts a rant on why Federal Reserve Chairman Ben Bernanke chose to cut rates by a quarter-point yesterday instead of a half. The internet is a blessing in so many ways, but its having given a bullhorn to an army of idiots is not among them.

May I point out that Ben Bernanke graduated from Harvard College summa cum laude with a B.A. in economics, then received his PhD in economics from MIT? He served on the President’s Council of Economic Advisers and was a member of the Federal Reserve’s Board of Governors before President Bush appointed him Chairman. I think he’s well aware of the implications of monetary policy. I think he understands inflation risks. I think he knows that credit markets need to remain healthy. I would go so far as to say he knows economics better than most bloggers out there, who tend to offer their economic opinions during lunch breaks at work in unrelated fields.

So, let it be known that I don’t think the Fed showed itself to be clueless yesterday, nor do I think the word “again” is appropriate because the Fed hasn’t shown itself to be clueless anytime in the last good many years.

As for financial, home building, and semiconductor sectors being down, yes they are and as ever The Kelly Letter is searching for value in them, along with other sectors and other countries.

“This market” is like every other market. You’ll notice after years of waiting for the market to be just right that it never is. You’ll realize after sitting out too many supposedly impossible rallies that the stock market really does rise twice as often as it falls, and that the trouble of the moment is just another twist on what was the trouble of the moment a year ago, three years ago, and even 30 years ago.

Markets fluctuate. Media sensationalize. Investment services spew articles showing there’s a 51.09% chance of a certain stock rising today because it has done so that percentage of the time every day after it lost the amount that it lost yesterday — as if such trivia is helpful in any way.

Find value. That doesn’t always mean cheap. It means buying a future earnings stream at a good price today. It might be a high price to those who don’t understand the earnings. That’s why we have to find the bargains. They’re not obvious.

That, Brian, is how I’m “playing this market.”

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