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Forget about predicting the movement of a market! April 26, 2010

Posted by shaferfinancial in Finance, Uncategorized.
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You can’t.  For the last year most of the internet chatter has been about what a sucker rally this market has produced.  They insisted it would fall back soon!  Now it might???  But, this has persisted as the market has made a +80% movement.  The point being is that folks should forget about the short term movements and think more about the long term possibilities.  The second point is that people should think about businesses, not macro economic events.

Now Buffett and others have pointed this out many times before.  But, the mainstream media and the internet has a vested interest in keeping you looking at the wrong things.

Take Goldman Sachs today.  The legislature is finishing up its work on financial reform and seems to be going to eliminate leveraged derivatives going forward.  From now on when you are involved with a derivative you must have cash available to cover any potential losses.  This along with the SEC accusing it of fraud has driven the price of GS down significantly over the last couple weeks.  So much, in fact that the current P/E ratio is below 6.  That means if future earnings are 2/3 of current earnings then the P/E ratio would rise to the average for the S & P 500.  No doubt, some people think that the federal government will drive it out of business or fine it out of business.  But is this likely?  GS derivative business represents less than 5% of its profitability.  So why is 66% of its profits thought to be at risk?

Now, personally I am not invested in GS other than owning Berkshire.  But, I think this is an example of people looking at the wrong things.  There is going to be reform that will hurt some of GS’s profits, no doubt.  But 2/3 of it?  And this SEC investigation is far from a sure thing for the government and will likely end up settled for a marginal amount of $$.  Cash flow and profits is what makes stocks a good or bad value.  Seems GS has ample amounts of both.  But if you are thinking short term, you can’t see it.

Keep your eye’s glued to cash flow and profits.  Think long term strategically.  Watch for weaknesses.  Keep a list of stocks you are considering and watch for value in those stocks.  Don’t panic sell good companies because of short term emotional reactions.

If you can’t abide by those rules, get out of the market!

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