The One Strategy You Need for Fourth Quarter

In early 2011, omniscient pundits predicted that there would be a major downward correction in the markets before Christmas -- which would then turn into a bear cycle. I wouldn't say that was incorrect so much as I would simply call it dumb. Now, after the S&P witnessed around a 15% gain year to date, they're at it again. Everywhere you read there are predictions of a downward spiral driven by weak earnings reports. Will stocks perish in the fourth quarter? Can Jim Lehrer moderate a presidential debate? The answers are strikingly similar.

Trick question
If you answered "No" to either of those questions, you would be half-right. The truth is, unless your investing consists solely of going long or short the S&P, you don't need to pay one bit of attention to what any of these guys are saying. It is often mentioned that investors have short-term memories, so let me jog them: The companies you spent hours researching and cherishing in your portfolio have not changed in the last 30 days. The fourth quarter of the calendar year cannot magically transform the stock market into a death trap that will leave you penniless. Pay no heed to that guy you saw on CNBC from Hootenanny Capital Group saying to sell everything now and take your profits.

You've heard this before: When the squawkers are saying one thing, you can almost always count on its opposite. Have some faith in the work you have done and the investments you have made.

Fourth-quarter blues
So there are "consensus estimates" of a 1% to 3% decrease on average for companies reporting third-quarter results. Let's play along with this logic for a moment -- why not? Let's say Whole Foods Market (Nasdaq: WFM  ) reports that its sales were down a point from third quarter of last year to this year (that is not a prediction; I don't know or care). Where might that percentage point have come from? Maybe bad weather on a couple of big shopping days kept some people inside. Maybe with gas getting more and more expensive, people took fewer trips to the supermarket. Maybe we're all switching to juice diets. What I'm trying to say is that a point doesn't matter, and neither do two or three points. Now, if the same thing happened every quarter for the next year and the reason was that people were switching to another grocer, then you'd have an issue with your stock -- not the market, but your stock.

I don't know many people who would buy a stock based solely on a one-percentage-point uptick in sales. So why should we care if there is a downward motion of the same degree? Does that make any sense?

Eliminating a sector
In this atmosphere of pending fourth-quarter doom, have we taken into account the financial sector at all? According to the useless efficient-market theory, the market prices both past results and future expectations into a company's share value. So with the Fed's recently announced "Quantitative Easing III: The Return of Bernanke," banks are going to have a wonderful end to the year. Wells Fargo (NYSE: WFC  ) , which holds an incredible portfolio of home mortgages and now has its risk bought up by Uncle Sam, is going to be a phenomenal stock in the short, medium, and long term. The housing recovery will keep this company soaring for many months to come -- no matter what Alcoa's earnings report says.

Even stocks I don't like have a great outlook for the end of the year, including Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , and JPMorgan (NYSE: JPM  ) . Are these enormous companies of no relevance to the market as a whole? Will their guaranteed boost from the government play no part in the market outlook? Why is anyone asking something as ignorant as, "Will Stocks Survive Q4?" Reports like this are short-sighted, irrelevant, ill-informed, and a public disservice.

Your best bet
The last three months of the year will ask nothing different of you. Don't be led astray by the misguided direction that pours out of financial outlets; that's like trying to find a Denny's using Apple Maps.

If your stocks aren't awful to begin with, you're fine. Keep your holdings and buy those that are artificially cheapened by the market jackanapes.

In the meantime, read a premium report about the first company I mentioned, Whole Foods. It will tell you all you need to know about the company's opportunities and challenges, and it comes with a year of free updates. Click here to claim your investing edge.

Fool contributor Michael Lewis owns none of the stocks mentioned above. You can follow him on Twitter @MikeyLewy. The Motley Fool owns shares of Citigroup, Wells Fargo, Whole Foods Market, Bank of America, and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Whole Foods Market and Wells Fargo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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