Financial crises. Bank failures. Subprime meltdown. Downgrade. Occupy Wall Street. Income inequality. Currency wars. Tax increases. Volatility. Deflation.
The headlines have been ugly, and the geopolitical and macroeconomic environments have been scary these last seven years, resulting in extraordinary damage to consumer confidence. We live in an uncertain economic landscape.
No wonder we are constantly asked about the apparent disconnect between this reality and a stock market that has risen more than 200 percent from March 6, 2009 to Dec. 31, 2014.
Yet, here I am towards the beginning of another year with the same proclamation as the previous five: I do not understand why anyone is surprised that the U.S. stock market finished 2014 in all-time high territory.
The fact is that the above concerns have been distractions. When it comes to intelligent investment choices, the focus must be elsewhere.
The business of America is business, not government, and certainly not politics. The U.S. stock market is the single best representation of the state of business in America. When Federal Reserve Chairman Ben Bernanke and European Central Bank Chairman Mario Draghi were asked what they did after waking, each said they first checked the U.S. stock market. The biggest business story since 2009 has been the market’s resilience despite the overwhelming bad news.
At a time of resolutions when we focus on faith, family, friends, fitness and health, this also is a time for resolutions for investors. While there is no magic formula, there are principles to serve as a guide to excellence in investing:
1. The headlines listed above are market events, not economic events. Market events can, but rarely do, become economic events.
2. Economic events relate to the big three influences on stock market behavior: interest rates, the rate of inflation,and corporate profitability. The Federal Reserve adjusts interest rates as it monitors leading economic indicators, primarily the rate of inflation. The policy of quantitative easing has driven rates low and risk assets high since 2009. By contrast, corporate profits are driven by company managements who control decisions on productivity and are measured by their balance sheets, cash flow, profit margins, earnings, treatment of shareholders, intelligent pricing power and cost control.
3. The economy and the stock market are cousins, not twins. Markets typically discount economic growth well in advance. Much of the rise in 2014 was based upon economic growth to develop this year.
4. Volatility is not risk. Risk is the potential permanent loss of capital; volatility can be the investor’s friend. No risk equals no return.
5. In times of heightened volatility, consider probabilities versus just possibilities as to the realistic outcome of current events affecting stock prices.
6. Separate the noise from the signal. Investors deal with fearful news and contrasting opinions, but they must learn to distinguish between what matters and what does not.
7. Behind every stock lies a tangible, operating business, and ultimately, a stock can perform only as well as the company itself. Nothing builds net worth like the ownership of a great business.
In investing, it’s always fear versus confidence, and an investor’s behavior and discipline dictate performance. Sometimes, attitude is more important than facts.
Jim Hansberger is managing director-wealth management, Hansberger & Merlin at Morgan Stanley in Atlanta.
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