On October 1, I alluded to the fear that surrounds the month of October for investors. The famous October crashes of 1929 and 1987, plus several straight years of recent October disasters, including the Asian crisis of '97 and last year's Long Term Capital Management debacle, had all combined to give investors a torrid case of the heebie-jeebies as we entered the crisp autumn month this year. But what's happened since then? Take a look at our Rule Makers' results:
Rule Maker Oct. 1 Dec. 3 Gain/Loss Yahoo! (Nasdaq: YHOO) 175.44 253.00 44.2% T. Rowe Price (Nasdaq: TROW) 26.44 37.69 42.5% Coca-Cola (NYSE: KO) 49.06 68.19 39.0% Cisco Systems (Nasdaq: CSCO) 68.88 95.56 38.7% Gap Inc. (NYSE: GPS) 34.00 42.13 23.9% American Express (NYSE: AXP) 131.38 157.25 19.7% Microsoft (Nasdaq: MSFT) 89.98 96.13 6.8% Intel (Nasdaq: INTC) 74.94 78.69 5.0% Schering-Plough (NYSE: SGP) 47.50 49.56 4.3% Pfizer (NYSE: PFE) 37.31 35.88 (3.8%)That's an average gain of 22.0% for Rule Makers, versus a comparable gain of 11.2% for the S&P 500. For Rule Maker, that kind of two-month gain is far better than what we can typically expect for an entire year.
Wise commentators seem to believe the sharp rise has something to do with an excellent profit outlook for the coming year and subsiding Y2K concerns. On top of all that, today, Wall Street was gleeful over a steady 4.1% unemployment rate, which calmed fears that a lower rate might've drawn another interest rate hike from Greenspan and Co.
At this point, you may be wondering if we could've foreseen this October/November rally. If only we'd spent our time poring over Standard & Poor's outlook for next year's profit growth. If only we'd better evaluated the likely outcome of Cisco's lack of Y2K worry in its early November earnings conference call. If only we'd used this space to learn how to analyze the Bureau of Labor Statistics' unemployment report.
Futile, all of it. Let's leave it to the Wise to try to game near-term market events and investors' subsequent reactions. Especially when it comes to economic data. They don't call it the dismal science for nothing.
As this unprecedented bull market rages on, here are three pieces of advice that I think will serve Fools well:
First, keep your attention squarely and exclusively focused on the business performance of individual companies. Y2K, economic data, interest rates, currency fluctuations -- these are all wildcards that should essentially be ignored. All this macro stuff is highly unpredictable.
In contrast, individual companies can be well understood, and their operating performance can be predicted to a significant degree. Using the Rule Maker criteria, you can get a handle on a company's financial picture with only a half an hour's work. And with practice, it won't even take half that long when using one of our RM Spreadsheets. If you haven't already, check out some of the company analyses that are taking place on our RM Companies message board:
- Nokia's Historical Margins and Flow Ratio
- Coca-Cola's Third Quarter
- Pfizer's Third Quarter
- Schering-Plough's Third Quarter
To be sure, the overall stock market cannot continue its current 20+%-per-year pace forever or even for another five years. But that's no reason not to keep your long-term savings fully invested, especially savings that won't be needed for at least 10 years. (See Monday's Boring Portfolio for more on the rationality of staying fully invested.)
Third and final nugget -- don't get scared out of your best stocks as they race to new highs. Again, I learned this one by getting it wrong for years. Some investors become nervous nellies when their stocks dive 50%. I'm the exact opposite. You know what I'm talking about if you've ever given a dog a piece of steak. Most dogs will practically swallow the meat whole in fear that this good fortune is certainly a mistake that's about to be taken away. The dog misses all the enjoyment of what should be a delightful treat.
Similarly, as soon as I have a "decent profit" in a stock, I'm tempted to "take a little off the table." Fortunately, the insight of my accumulated mistakes has enabled me to restrain this most unprofitable urge. Your high-flyers are likely your best companies, the ones that will define your overall portfolio returns for decades. Need some evidence? Paul Larson's October 13 Rule Breaker report, "Where Would We Be Without ______?" is required reading for all investors who call themselves Fools.
In sum, as the stock market tests new highs, just remember to keep your focus on your individual companies, don't be a knee-jerk contrarian, and don't get scared out of a good thing by your profits. And if this bull has treated you well, consider donating some stock (and thus avoiding capital gains taxes) to one of our Foolish Charities.
Have a great weekend, and Fool On!