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Back to the Future

I have been around for a while now; decades. I remember when investing was done by stock picking. A stock’s value is mostly the current value of its future cash flow. A good stock picker analyzes the future prospects of the underlying company, buys its stock, and rides the price appreciation as the analysis hopefully unfolds. However, today the Federal Reserve openly states that it targets the level of the stock market as a policy tool to change the “mood” of the economy and thus stimulate economic activity. The plan has been/is to boost asset prices, revive the economy’s animal spirits, which then will start to create jobs. It worked in their mathematical models, but not so much in the real world. The markets are way up, the economy not so much.

Add to this how massive pools of money have developed complicated formulas implemented rocket fast with massive computers jerking markets hundreds of points back and forth with reckless regard. These moves have little to do with underlying value or future cash flows.

How does one cope? One way would to not yield to this at all; to ignore it. Ultimately, all that matters is Fair Value. Fair Value is like gravity. What a company is and will be determines its stock price. This is Fair Value and over the long run, it always wins. So buy quality and only at a good price. Sometimes it involves a great deal of patience. Trade the euphoria of runaway advances for confidence in scary declines as computers run the markets to short run extremes. Go back to traditional stock picking to deal with the future of seemingly crazy markets.

It can be easy to do. Some of the best stock pickers are readily available through tried and true mutual funds.