Now that the Dow has danced on either side of 14,000, I've noticed an uptick in my emails from friends and colleagues about what to do next. They fall into three basic categories: Should I sell, should I buy, or should I simply hold?
Some are still spooked from the collapse of 2008 when the market fell nearly 50 percent from its 2007 high and they see two pieces of bad news behind every morsel of good. Others are waiting to dive back into stocks after parking their money into low interest account for the past couple of years. Some others are even dusting off their books that predicted that the Dow would hit 30,000. What should they do?
First, let's all take a deep breath.
Watching the Dow hit 14,000 reminds me when I turned 50. When I crossed that milestone, I felt great, had a wonderful party, and took stock of things. However, on the day after I turned 50, it was simply back to work and any celebrations were in my rear view mirror. I think that is what's going with those major institutional investors who can move The Street.
Let's not forget that the Dow is really only a daily snapshot of how the major investment houses feel about a select group of 30 major stocks. However, over time there has been so much focus on what the Dow means that it has become a shorthand snapshot of the entire economy.
But ask yourself this question. Is the economy 14 times better than it was in the early 1970s when the Dow hit 1,000 for the first time? Is the economy nearly three or four times better than the go-go 1990's when the economy was firing on all cylinders and a market correction barely elicited a yawn?
Of course not.
Membership in the Dow has changed over the years just like the face of the American economy has evolved. Gone are some old dependable stocks like American Rubber or Eastman Kodak. They have been replaced by Microsoft and Casco Systems, companies that were barely on anybody's radar screen in 1980.
I think we focused too much on the position of the Dow instead of looking deeper at the individual stocks that comprise that part of our portfolio.
When the market hits 14,000 it is like hitting a milestone birthday. There are headlines on CNBC and in some trading floors, I suspect that champagne bottles are being uncorked. People will ponder about the future and a few will prognosticate as they stare into their own belly buttons. Profit taking is inevitable and some will sell while others will buy or hold.
The reason I bring this up is because Warren Buffett always invested in companies and not their stock curves. He would find companies with stellar economic fundamentals and invest heavily when temporarily undervalued. He was always attracted more to balance sheets than anything found on the Dow. Like many, he felt that by the time a stock had become "hot," it was probably trading at an artificially high price point.
I doubt that you would find See's Candy on anybody's list of companies that they like to own. It is an unsexy combination of sugar and cocoa that is hardly trendy, but because they have been aggressive about creating their brand value, people would rather buy See's because consumers implicitly understand the value that comes when they walk into one of the See's candy stores. As a result, their margins remain high and little See's Candy has been an unbelievable profit machine for Berkshire Hathaway since Warren Buffett purchased it outright many years ago
Even when it came to his position within Goldman Sachs, Warren Buffett maintained the same thought process. He came in at a tough moment during the 2008 meltdown, maintained a disciplined approach and made a second fortune. The Dow might rise or fall and we may be in times of war or peace, but the key to financial success will be doing your homework when it comes to the individual investments you choose to make, the aggregate total of the Dow at any particular movement.
However, just like any birthday, tomorrow is another day and life goes on. Of course, since Valentine's Day is just around the corner, have a piece of See's Candy.
Have you ever made an investment choice solely on emotion? How did it turn out? Did you regret it or was it a good choice in the end? Email me at firstname.lastname@example.org
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