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Stocks: The Only Way to Make Sense of This Market

By Alex Dumortier, CFA - Sep 11, 2015 at 1:20PM

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Even the most successful investors disagree on the stock market's short-term prospects. The only way to make sense of the stock market is to stop trying.

Equity traders are exhibiting little conviction at the end of this shortened week, with the Dow Jones Industrial Average (DJINDICES: ^DJI) up 0.04%, and the benchmark S&P 500 (SNPINDEX: ^GSPC) down 0.18% at 2 p.m. EDT. 

Everyone has an opinion on the stock market. We were treated to those of three prominent hedge fund managers on CNBC this week alone (my emphasis): 


Today, the stock market is on [...] call it next year estimates [...] is something less than 15 times earnings. The earnings yield on the stock market is something approaching 7% -- this is in a slightly more-than-a-2% 10-year [government bond yield] environment. [...] Stocks are pretty cheap right now. -- Activist hedge fund manager Bill Ackman (Pershing Square Capital Management) 


Even though I think the market is in a zone of fair valuation, I think the market is not in a position in my opinion to go down a lot, and I think that the path is still upward. -- Hedge fund manager Leon Cooperman (Omega Advisors) 


I'm not probably as bullish as I could be because I have problems with earnings growth, I have problems with [price-to-earnings] multiples, all kinds of problems, so I can't really call myself a bull. [...] We're talking about a market that should correct." -- Hedge fund manager David Tepper (Appaloosa Management)

Are you confused yet? 

Let's see now. Ackman thinks stocks are "pretty cheap" based on the market's price-to-earnings multiple, while Tepper has "problems" with price-to-earnings multiples. Cooperman says the market isn't "in a position to go down a lot," while Tepper thinks the "market should correct." 

If their net worth is any benchmark, then all three have been wildly successful as investors: 


Net Worth* 

David Tepper 

$12.0 billion 

Leon Cooperman 

$3.4 billion 

Bill Ackman 

$2.6 billion 

*As of Sept. 11, 2015. Source: Forbes.

Three investors with successful track records, three very different opinions on the market. How are we supposed to make sense of this? 

On one hand, we could observe that we're in an exceptional environment, what with a stock market collapse and slowing growth in China, and the Fed getting ready to raise rates for the first time in nearly a decade. Perhaps the complexity of circumstances is confusing for all investors, including highly successful ones. 

I think there is some truth to that explanation, but it's not enough. Every market environment is, in a sense, one that we have never seen before, with its own unique set of characteristics (even if we may recognize some similarities to previous periods). 

Furthermore, the market is inherently unpredictable over short periods of time. As such, it's not surprising that investors -- no matter how successful -- might have different opinions in that regard. 

Finally, none of these three money managers made their money guessing what "the market" was going to do next and placing their bets on that basis. I think they realize that's a (small-f) fool's errand to which they can bring no advantage. 

(Bill Ackman is an activist investor who seeks to influence the way a company is managed. Leon Cooperman is a good old-fashioned stockpicker, while David Tepper's specialty is distressed debt investing.) 

One very successful investor who has enough self-awareness (and self-confidence) to admit he has no expertise in this area was also on CNBC this week. On Tuesday, in response to a question regarding recent market volatility, Berkshire Hathaway CEO Warren Buffett (net worth: $62 billion) said: 

I'm no good on what's going on in markets. I have no idea what will happen tomorrow or next week, and sometimes they get very volatile like this, and other times they put you to sleep. But the important thing is where they're going to be in five or ten years, and I'm confident they'll be considerably higher in ten years, and I really have no idea where they'll be in ten days or ten months.

Take a page from Buffett: Keep your head down, keep saving, and keep investing in the stock market via low-cost index funds (with "long-term money" only). The payoff will be much better than listening to people expound on where Mr. Market is headed over the next several months -- with a lot less stress.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$31,500.68 (2.68%) $823.32
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,911.74 (3.06%) $116.01
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$278.28 (4.02%) $10.76

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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