As I have mentioned a time or two in the past, I think one of the biggest lessons investors (professional or otherwise) need to learn is to put the T.V. on mute, to avoid reading everything on the internet, to stop listening to “tips” and “trades,” and to forget about the “fast money” altogether. Instead, serious investors need to focus on developing their own “inner circle” of folks they trust and listen to – and then ignore everyone else!

For me personally, I prefer to keep the list of professionals I read/listen to pretty darned small. I don’t do this because I think I know more than the next guy. I probably don’t, as there is an abundance of highly educated guys/gals on Wall Street that are a lot smarter than I am. However, I have learned over the years that I need to think for myself and, perhaps more importantly, to implement an investing style that suits my personality.

For example, a black-box quant system can be a great way to invest. So too is a completely subjective, discretionary trading style. And employing option-based hedging strategies to a long-oriented equity portfolio is a strong approach. And then there are there any number of purely technical trading strategies, to say nothing of the long-only, buy and hope approach, etc., etc.

The bottom line though is I can’t use any of the above. None of these approaches “work” for me in my head. You see, I have tried a LOT of strategies over my 30 years (most of them in my younger days) of professional investing – and I have learned that I can’t simply give up all control and let a black box run my money. Nor can I trust myself to run a completely flexible, go-anywhere trading style for any length of time. I can’t do it. And I know this.

So, the first point on this fine Tuesday morning is to first learn to “know” and then “trust” yourself.

This was also a rather convoluted, long-winded way of saying that I read something from one of “my guys” yesterday that was so good, I want to share it – in its entirety.

Below is a great piece on investing from Brian Wesbury, who is the chief economist over at First Trust. I’ve been reading Brian’s work on economics and investing for years and I always enjoy his straightforward approach.

This week, Brian reflects on the last 10 years of investing. In his piece, Mr. Wesbury beats us between the eyeballs with the concept that it is all too easy to be “too smart by half” (my words, not Brian’s) and to mess up a really good thing in the process. So, without further ado, please enjoy Brian Wesbury’s piece entitled “Stocks Won.”

Stocks Won
By Brian Wesbury

Next Monday (October 9th) will be exactly ten years from the stock market peak before the Financial Panic of 2008.

Imagine that Doctor Doom, the perceived “best analyst in the business,” told you on that night, when markets peaked, that financial authorities would allow mark-to-market accounting rules to burn the banking system to the ground, with many well-known financial firms failing or being taken over by the government. You knew the unemployment rate was going to soar to 10% and the economy would experience the deepest recession since the 1930s. You also knew the US would soon elect a president that would socialize much more of the health care system, raise top income tax rates, and push the Medicare tax for high income earners up by an additional 3.8%. Finally, you knew that ten years later all of those new taxes and expanded health care policies would still be in place.

Then imagine you knew the federal debt would be more than 100% of GDP, with massive annual deficits predicted as far as the eye could see.

Then, imagine you were allowed one investment choice, a choice you had to stick to for the next ten years, through thick and thin, no reallocation allowed. Put all your investable assets in the S&P 500, a 10-year Treasury Note, gold, oil, housing, or cash. Pick just one of these assets and let your investment ride.

Which asset would you have picked? Be honest! In that environment, with that kind of foresight, right at a stock market peak, it would have been awfully tough to pick stocks.

And yet, on the basis of total return, over the last ten years, that’s the asset that did the best. Assuming no major shift in the next week, the S&P 500 has generated a total return (capital gains plus reinvested dividends) of 7.2% per year, essentially doubling in value in ten years.

Gold did well, but lagged stocks, increasing 5.7% per year. A 10-year Treasury Note purchased that night (now coming due), would have generated a yield of 4.7%. Oil was a laggard, down 4.3% per year. Home prices increased about 1% per year, on average, and “cash” averaged 0.4%, both trailing the 1.6% average gain in the consumer price index.

You might have slept better by investing in 4.7% Treasury Notes. Certainly the volatility of stocks, and the cascade of financial news headlines predicting doom and gloom over the past ten years, wouldn’t have bothered you as much. But you’d have fewer total assets today than if you would have kept the faith and stayed long stocks. And if you wanted to reinvest, now, for the next ten years, your rate would be roughly 2.3%.

If you knew exactly when to buy and sell each of these investments over the years, you could have done better, but no one did that and no one knew how to do that.

So, what’s our point? You would have been better off by ignoring all those pessimists who became famous in 2008-09. Investing in companies, and allowing world class business managers to use your money to build wealth, was once again the best investment strategy. Ten years on, we still think that’s true.

Interesting, eh? My takeaway is that even if you were fortunate enough to predict the future with perfect accuracy, you probably wouldn’t be able to know how the markets will react in advance. So, in my humble opinion, the best we can hope to do is to stay in line with the primary market trend/cycle and attempt to “get it mostly right, most of the time.”

Thought For The Day:

Worry often gives a small thing a great shadow. -Swedish Proverb

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

    1. The State of Tax Reform

    2. The State of the Economic/Earnings Growth (Fast enough to justify valuations?)

    3. The State of Geopolitics

    4. The State of Fed Policy