Learn the major dynamics of the market, but don’t waste time digging for a fine understanding of everything. That’s a mission no one can afford. Take a clue from the nail. It’s narrow and pointed for a reason.
Investing and money management present learning curves. Learning curves challenge–should challenge. Learning takes looking and looking takes time. How much do you have? Just as we thought. Fine. Make it count. Clarity and focus helps that. Mission creep does not. But how can we focus our exploration? We focus by dialing out the unnecessary.
The people who built this were forced to choose. You can’t probe it all. Congress gave them 50 cents and wanted Pluto. Attempting to fully understand everything is like being told to vacation on Pluto. We’ll get right on that.
The Huge Mix.
What’s our largest market? Anyone? Equity index futures? Bonds? FX–currency? Is this going to be on the test? In this case size matters. Money flows and when huge amounts move and collect in specific places it creates wave slosh. That matters. When money moves in a big way it means sentiment has shifted. Equities are a smaller ship and thus move around more amid money waves. That part’s on the test. Money or water, waves have impact. Ask people living on the southern U.S. coast.
It’s impossible to intimately know them all; stocks, bonds, currencies, commodities, derivatives, IPOs, real estate, etc. We don’t believe anyone who claims they do. But you don’t need to be an expert at each to gather their impact on your stocks. Focus on the connecting relationships. That’s what you need.
Derivatives are by far the largest market on the planet. Derivatives derive their value from an underlying asset. That market is valued at a planet-sized $544 Trillion dollars. Illustrations work. See the best simple representation table we’ve glimpsed lately. Very nice and quick. Now you know relative market sizes, or market caps. Listen to the news about each with relative size in mind. Look at the graphic, seriously.
Bonds, the 10-year, determines the value level of virtually all other asset classes, including stocks, and homes. Institutional money sets equity prices. That’s groups like private equity, sovereign wealth funds, endowments, state-run pension plans. They are the trucks as we are pedestrians playing on their heavy-vehicle freeway.
We included these bits about the derivatives and bond markets because such over-arching realities are precisely the type of active ingredients you need to know as an equities investor of any kind.
But what about the inverse yield curve, incremental moves in said bond yields, and the latest ISM manufacturing Index read down to the decimal? Exactly. Do you worry about the little waves while on the beach? You worry mostly about the big waves being punched up your driveway by a storm as wide as the Gulf of Mexico. Pay attention to that yo. Many didn’t. And that’s exactly the point. Let’s see if Peter Lynch can add something to our focus;
WHAT ARE THE 3 MOST IMPORTANT FUNDAMENTALS FOR ANY STOCK Peter?
“Earnings, earnings, earnings.”–Peter Lynch.
Going with a list works best. There’s way too much here to poke through absently. Set your list, before you shop.
Things you don’t need to know.
Knowing exactly what you don’t need to know frees you to focus on the need to know. You can’t ever know it all anyway. So let’s tighten our daily process down on crucial facts. Theo knows. Check Theo’s list of 8 things to know about earnings season and our economy. Here we’re cutting away the distractions.
1. Individual investors do not need to know the precise level of the DOW, NASDAQ, or the S&P 500 everyday. Big market days stand out all by themselves, if you’re connected. If you’re a very active trader, rather than an investor, you may need to know daily moves. Most of us do not. Right now our markets have run up in a snappy way. That you need to know. Our bull is long-lived, yet still super strong–getting stronger even. That, you need to know.
Market direction, breadth, and depth, are all good info to know if you’re investing in individual stocks. Index fund investors will be much better served by not tracking daily moves. Track the fund itself, using the market as your benchmark. Trends determine direction, not individual sessions.
2. You don’t need to know every incremental move in the bond market. Bonds are complex, their market dynamics complicated. That’s why specialists exist. Yeah, bonds ultimately set stock prices. However, know that along with derivatives, and index futures, the bond market dwarf the equity market. Why know this? Because all markets are interconnected. Commonly we hear the bond market’s effect on the equities market. Again, it’s the bonds that set all other asset prices. So, know that.
But the bond market’s effect on stocks is indirect, unlike earnings. Simply know the health of the market, the shape of the yield curve, not every twist. Know that the share prices of dividend-paying defensive stocks retreat as interest rates rise. That’s important.
Been there done that. Think streamlining. Too many reminders or missions create numbness and dumbness.
3. The IPO market. Initial public offerings can be a terrific opportunity, if you know what’s on offer, and you have access to a good broker who will get you shares. That typically means a very big broker like Goldman. Fidelity’s not going to get you in to many highly anticipated offerings–like when Twitter went public. Frankly, almost no one possesses both adequate company knowledge and a broker with access. We refuse to “bet” on a box with a ribbon.
Do you need to know the IPO world to be a great investor? No. Yes, one can turn a very fast win here, or be plunged into a sick and slimy hole of that-was-dumb. Honestly, we don’t trust companies without track records, or public caches of financial data we can evaluate.
4. The gyrating antics of activist investors. Remember Bill Akman and Herbal Life? Did you waste any time on that one? There was no long play there we wanted and we don’t short. The often noisy actions and flourishes of activist investors typically mean little to most investors. It matters if they target one of your long positions. Many big-fish investors seem to love the cameras and fuss.
It means absolutely nothing that CNBC covers something. They have a whole lot of time to fill, and ads to sell. CNBC covers activists because, they have a lot of time to fill, and perhaps something interesting just might eventually occur. The actions of gigantic investors can be interesting, but rarely move your stock’s price. We don’t rely on them for ideas. Look at Buffet. He likes Wells Fargo. He defended Wells. Huh? He liked IBM too. Now he doesn’t like “Big Blue,” after yet another crappy IBM quarter. “Watson,” really?
Tracking the actions of high-profile investors is entertaining. Yet it has proved time and again to not be a wise thing to mimic such investing moves. But if an activist investor buys into a stock you own, you need to know. If one sells a stock you own, you’ll know. Either way, pay attention.
5. The seemingly random limelight-sucking musings of regional federal reserve heads, one of our favorite pure time-wasters. Regional fed presidents are a verified stupendous waste of time. You’ve heard it CNBC–“we’ll be right back with whoever from the whocares regional fed stay tuned.” Afterward comes. And what the hell can you possibly do with a bulging bag full of “maybe” or “I think?” You may struggle to find a moment worth less.
Statements from bobble-head regional fed? Um hum. What the hell can you possibly do with a bulging bag full of “maybe?” A video of a tree falling on a truck. Better.
We’ve suspected for some time that regional fed presidents over-time grow rigid through stark boredom. Adrift for long periods of time behind the headlines, they grow desperate for some crumb of relevance. That’s when they make statements absolutely no one cares about. You shouldn’t either. The comments of regional reserve banks are utterly meaningless to investors.
Thanks for reading. Keep looking.