The financial news media cracks me up.
Back when they were making their 2007 prognostications, I read article after article citing all the reasons why large-cap stocks were poised to make a market-crushing run. Some, such as Dell (NASDAQ:DELL) and Home Depot (NYSE:HD), were trading for historically low earnings multiples. Others, such as Wal-Mart (NYSE:WMT) and AIG (NYSE:AIG), had been steadily growing earnings without seeing a correlating rise in stock price.
A reversion to the mean is coming, it was said, and large caps stand to profit the most.
Or it can get more complicated ...
Then there were the macroeconomic theories. If a recession is coming, investors will flock to quality and invest in large caps. Or, if the dollar continues to weaken, investors will buy shares of companies that do significant business overseas -- such as IBM (NYSE:IBM), Starbucks (NASDAQ:SBUX), and Johnson & Johnson (NYSE:JNJ) -- to see their earnings boosted when they repatriate profits.
Of course, there's a flip side to every one of these arguments. Take, for example, this post from WSJ.com. The author submits that a weakening dollar will actually cause large caps to underperform! If the dollar continues to lose its value, foreign investors might take money out of the United States -- money that they tend to keep in less-risky large caps. Moreover, a weakening dollar could maintain the current low interest rate environment, making it easier for small companies to finance growth.
Does your head hurt? Yeah, mine too. And so far this year, small caps and large caps have pretty much walked in lockstep.
What can experts really teach you?
See, experts can hem and haw about how X will affect Y unless Z is raised to the third power, blah blah blah ... it doesn't matter. Just know that if you read the financial news, you'll get a lot of free advice. And remember that with free advice, you get what you pay for.
In other words, silence the noise.
Don't worry about macroeconomic theories or the prognostications of media experts.
Silence the noise.
Because if you do three things, you will beat the market over decades and make a fortune from your compounding returns.
Your to-do list
What are those three things?
- Buy great companies.
- Hold them for long periods of time.
- Continue to add new money to the market in good and bad times.
In essence, that's the most important investing lesson of all.
Fool's final word
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- Organizations built to last for the next 100 years.
- Little-known companies that dominate relevant business niches.
- The best companies in out-of-favor industries.
- Management teams with great reputations, strong core values, and significant ownership stakes.
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This article was first published Dec. 22, 2006. It has been updated.
Tim Hanson does not own shares of any company mentioned. Dell and Starbucks are Stock Advisor recommendations. Dell, Home Depot, and Wal-Mart are Inside Value recommendations. Johnson & Johnson is an Income Investor pick. The Motley Fool's disclosure policy wants you to let it know ... should it stay or should it go?
