Opinion and Investing Column

HICKS: Short-term thinking won't yield long-term payoffs

December 12, 2009

Nouriel Roubini, the economic guru of the credit crisis who correctly warned that the world would experience a sharp plunge in economic activity, continues to believe there is still plenty of pain ahead.

Jim Paulsen at Wells Capital, who greatly underestimated the extent of the crisis by maintaining a bullish view throughout, continues to see sunnier skies ahead.

The conundrum is that, while many investors correctly sided with Roubini and his accurate forecast of a dire economy, the most lucrative investment strategy would have been to adopt a bullish stance like Paulsen’s, buying stocks throughout the so-called Great Recession.

Macroeconomic forecasting is a tough “science.” As the forecasts above show, one may have the economy completely right, but that doesn’t mean it will make you any money as an investor. The stock market will often move independent of current economic conditions.

Thus, predicting near-term outcomes for the economy or the stock market is a futile exercise. But here is the good news: You don’t need to bother with these forecasts to be a successful investor.

More than a few of the great investors have been heard to say that if you spend five minutes analyzing the economy, you have just wasted five minutes. They contend that if you focus on the underlying fundamentals and the value of the companies in which you are investing, the economic part of the equation will eventually take care of itself. Their macroeconomic view is simply that the U.S. economy is cyclical, but resilient.

What doesn’t work for investors are things like tuning into bubblevision each week and watching the countdown clock for the release of the unemployment report. Such announcements will have zero bearing on what an investor needs to do today or next month. Now, if you bought something yesterday and are planning to sell it today based on the market’s reaction to an economic statistic, there is another venue where you will feel right at home—Las Vegas.

Accomplished investor Michael Price, who used to run Mutual Shares, was asked right after the release of a recent unemployment report how the change in employment trends figured into his decision-making. He replied that he was certain that not one member of his investment team would even bring up the report in his office that morning because it didn’t affect anything they were thinking about. Instead, he wanted to talk about the potential returns he sees in small-bank stocks over the next three to five years.

At present, there are a number of widely divergent views on what lies ahead for the global economy and markets. In addition, there is always an economic statistic that grabs the headlines for a while. Right now, unemployment is the “market moving” number, whereas a year and half ago it was oil prices. It will be something else (interest rates?) in the months ahead.

The best results will be achieved by investors who study the businesses they own and focus on their long-term prospects, while freeing them from trying to predict the unpredictable.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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