October 29, 2013 Comments

Another good day for the markets on Tuesday with the S&P up 0.6% and Toronto up 0.5%.

It seems that there are times when the market goes down much further than most anyone expects (early 2000’s and 2008 into early 2009. Then there are other times like maybe now (thinking here of the U.S. markets) and like late 2002 to mid 2008 and most of the 80’s and 90’s where the market continues to rise more than most anyone expects.

Many people look for cycles or market indicators and try to guess the direction of the market in the very short term, the medium term and the long term. For short term they often speak of over-bought or over-sold, or resistance levels, for medium term they may talk of cyclic trends and cyclic bulls and bears and for longer terms it is secular bull and bear. Laughably they call a bear market AFTER the market is down 20% and a bull AFTER it is already up 20%.

I basically studiously ignore all of that. I cannot predict where the market is headed. But I can react to it. I can try to judge if the market is over-valued or under-valued. If we can buy stocks when the market is under-valued then we may lose in the short term but over the years we will tend to win.

We can also pretty much ignore the overall market and simply buy good companies at good prices. That tends to be a winning strategy over time.

In the next month or so I plan to look again at the valuation of the markets. The biggest driver may be interest rates. When the main choices are i) long bonds at 3% o 4% (and no growth), ii) short bonds at squat but hoped for reinvestment at higher rates later or iii) a market with a P/E of as high as 20 (5% earnings yield with growth) the market may be the best of a somewhat unexciting lot.

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