This article originally appeared on RealMoney.com on Sept. 3, 2014 at 3:00 p.m. To read more content like this AND see inside Jim Cramer's multi-million dollar portfolio for FREE... Click Here NOW.
We live in a complicated, fast-moving world. Information and news fly at us pretty much all day. For those of us who are investing our cash in stocks and bonds, it seems that market-moving news in the form of government and corporate announcements are hitting the news wire every minute or two. This year, the geopolitical situation has been especially prominent, with markets being tugged to and fro by news, from the Middle East but especially from Ukraine. In the short run, they can move markets around a bit. Trying to keep track of it all can be incredibly stressful.
I am something of a news junkie by nature. If my wife is not in the room, the TV is on MLB, The NFL, Turner Classic Movies or the news. The set in my office is always on either the financial news networks or one of the news channels. I read two actual printed newspapers a day and three or four on weekends. I stay on top of current events, and can sit around talking about them for hours. However, I have learned over the decades to ignore them when making investment decisions. I know some people that trade the headlines (I am convinced the reason Vladimir Putin is not worried about sanctions is that he is trading S&P futures in advance of his own pronouncements and troop movements, and making a fortune), but it is really an exercise in futility for most of us.
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This lesson was drilled home for me back in 1991. The First Gulf War was just underway. The consensus opinion among pundits, analysts and traders was that once the ground campaign began, the tough Republican Guard of the Iraqi army would take a horrible toll on U.S. troops and while victory was assured it would be a tough, expensive fight. Oil prices would skyrocket and the toll on the economy would drive down stock prices. Everyone had some version of that trade on, and even retail investors were loading up on natural resources stocks and mutual funds, anticipating huge moves in these stocks.
From the first shot, it became clear that the pundits were wrong. This was not going to be a long-drawn affair but a race to Baghdad. U.S. troops were able to protect most of the oil fields almost from the start, and there was not going to be a supply interruption. Oil prices collapsed and stock prices soared. The next day was a painful lesson for a lot of people, including me, who were so sure they knew not only what would happen but, more importantly, how the market would react. We were wrong.
There will be times, like the Asian contagion of 1998 that helped fuel the collapse of Long-Term Capital Management, when markets react to events with a sharp selloff. At such times, we can scoop up stocks at bargain prices and take advantage of the volatility and dislocation caused by events after the fact. Reacting to what the market is actually doing in these situations rather than trying to predict events and outcomes is a far more profitable endeavor. Until something occurs, it is best not to make geopolitical concerns too big a part of your investment decision process.
I have no idea how markets will react to future events in areas like Ukraine and the Middle East. What I do find interesting is that the value proposition has us in a pretty good position to benefit, no matter what happens. If we get an oil spike out of Middle East turmoil, my drillers below book value like Hercules Offshore (HERO) , Swift Energy (SFY) and Rowan (RDC) should benefit. My growing collection of small banks will feel no impact at all from anything that happens if things go badly in Ukraine, and any decline as a result of a broad market decline will be a major buying opportunity. We have a collection of dirt-cheap European banks like Commerzbank (CRZBY) and Societe Generale (SCGLY) that could rally quickly if things are concluded in Ukraine on reasonable terms. On top of that, the general lack of safe and cheap stocks is forcing deep value investors to hold a lot of cash right now.
The odds of being able to consistently figure out what will happen in the world and how markets will react are almost impossible. Focusing on valuations is the best way to position ourselves to profit no matter what happens in the world and the markets.
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