Today is the first day of the fourth quarter, so we’re getting lots of predictions from the talking heads. What will the stock market do in the final three months of the year? Which sectors will lead the way, and which will lag behind? Which stocks will be the stars and which ones the duds as we get into the all-important holiday selling season? Where will interest rates end the year? What will year-end earnings for the S&P 500 be?
I have a stock answer for all this: I don’t know, and I don’t care that much. And neither should you.
The prediction game, particularly about intermediate-term stock prices, is pretty much a waste of time. Most investors spend way too much time worried about the minutiae of the stock market and not enough on the bigger picture of investing.
Most days when I am out and about and someone asks where the market closed that day I have to look up the information on my phone. The day-to-day noise just doesn’t mean that much to me (unless something has caused a crash, creating significant inventories of cheap stocks in the process). The fact that Apple (AAPL) or Google (GOOG) was up or down by X% in a given day means nothing to me and doesn’t impact my long term returns in any meaningful way.
I suspect the fourth quarter will see more political shenanigans and maybe even an absolute disaster as we continue to entrust our government and treasury to a cadre of alleged leaders that make the Keystone Kops look competent. We have the current shutdown to deal with and the debt crisis hot on its heels. The confirmation hearings for the next Fed chair should be very noisy and create all sorts of short-term market noise for traders to toss around. I find it highly unlikely we’ll get any good news out of D.C. in the fourth quarter … but I am not going to rush out and short stocks based on that opinion.
I think retail will be far less than wonderful in the quarter as the government silliness could make consumers more than a little nervous. If we get a sustained shutdown, we will have 700,000 people who simply will not be spending much money for the holidays. It could get ugly — but given the current pricing of retail related stocks, that’s not actionable for me as a long-term investor.
Opinions are dangerous things when it comes to the financial markets. I may think retail will be slow, but until it happens and stocks like Macy’s (M) or Kohl’s (KSS) trade at really low multiples of assets and earnings, there’s nothing for me to do with my guess. I have made far more money reacting to what the markets actually do than I ever have betting on what they might do.
Right now I know that silver miners like Pan American Silver (PAAS) and Coeur Mining (CDE) are very cheap on an asset basis. I know that oil and gas producers like Swift Energy (SFY) and WPX Energy (WPX) are priced as if no one will ever use the stuff again. I know that small banks like Cape Bancorp (CBNJ) and Essa Bancorp (ESSA) are crazy-cheap — and if the world does not end, those stocks will be a lot higher in a few years.
I act on what I know — betting on my wild guesses and predictions is a foolish endeavor unlikely to end in profit.
At the time of publication, Melvin was long SFY, PAAS, WPX, ESSA and CBNJ.