Taking Stock

Tony Crowell
Tony Crowell

Market Tuning Beats Market Timing

The financial media pump up fear and greed, often agitating investors to trade on emotions. This week, Tesla (TSLA-$297) hit a hot streak on news suggesting eventual profits. This sparked the rookies into thinking that it was time to get into the game. Maybe, but successful investing demands longer-range perspectives. Investors who want to be players fail when they succumb to the media and treat the stock market as a big casino.

Casinos are designed to create attention, excitement and false hopes of people looking for a quick profit. So were brokerage offices for many years with ticker tapes, messengers, bells, and pneumatic tubes whistling orders overhead. TV has taken over these dubious responsibilities. I hope no reader believes that Warren Buffett’s investment record comes from reactions to headline news. He studies financial reports in his calm office while listening to classical music and drinking Cherry Cokes.

Tesla is up 40% this year despite a few “Sell” recommendations. Its stock capitalization has passed Ford (F-$11) even though Ford sold 60 times more cars last year. Their founders, Elon Musk and Henry Ford, succeeded despite many speed bumps. Mr. Ford’s first company, the Detroit Automobile Company, failed in a couple of years. He tried again with 12 investors in 1903 and the Ford Motor Company prospered.

Sophisticated venture capitalists know that new ventures often need more rounds of cash. Amateur venture capitalists should realize that they are like the small stakes gamblers who are stuck with the lounge acts in the casinos rather than big stars. If they want some Tesla stock, fine, but they should try to view this as part of their overall finances, possibly by also owning Ford or my preferred buy, General Motors (GM-$34).

We are enjoying a sustained market uptrend, fueled by beliefs or hopes that the new Administration will enact pro-business policy changes. Jamie Dion, CEO of my favorite bank stock, JPMorgan Chase (JPM-$86), agreed in his annual letter with several of President’s Trumps goals such as cutting corporate taxes and pruning “unnecessary” regulations, but differed on immigration, trade policies with Mexico and China, the environment and defense spending. If differences widen with the corporate communities, the immediate premise of the market’s advance may weaken.

Its momentum is strong. The Dow Jones Industrial closed the March quarter up 5%, its sixth straight quarterly gain and the best such streak in over ten years. It got double-digit help from Apple (AAPL-$143) and Visa (V-$89), which have staked out very large and growing market positions. Amazon (AMZN-$895), which recently rang up six straight record stock prices, is another standout. Such stocks should be the nuclei of stock portfolios, particularly as the market’s gains are getting ahead of underlying earnings.

The “Shiller CAPE” ratio, created by Nobel Laureate Robert Shiller, is troubling. This uses inflation-adjusted stock prices divided by a 10-year average of real earnings. It is not a market timing indicator but is valuable in tuning portfolios. The historical average since 1881 is 15 and it is currently almost 30. It was higher only in 1929 and in 2000, both periods followed by sharp market declines.

Currently, the ten-year earnings average includes the depressed years after 2007, which will drop out lowering the average to some extent. There are also signs of economic recoveries that would bolster earnings, but the heightened ratio now emphasizes the need to tune stock portfolios toward companies like those mentioned earlier that can produce exceptionally strong earnings growth.

I’m adding BlackRock (BLK-$383), as its earnings strengthen. It is the world’s largest investment manager with over $5 trillion in assets under management. Its stability will build more growth as global volatility persists.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622


Share this:
View Our User Comment Policy


Please enter your comment!
Please enter your name here