value and opportunity

Funnily enough, exactly 1 year and one day ago I had a post about why I thought one should not pay any attention to the media circus regarding the Euro crisis.

This was the intro back then:

If you read any news source today, there is one common theme: “The EUR and the European union are doomed”.

Every economist, politician, bank boss, asset manager, talk show host (and their grandmothers) now know exactly what Target2 accounts are and why Europe is on a one way track into doom and bust. Additionally they usually mention that they always said so. Some of them offer additional advice for instance how helpful it would be if countries would go back to their own currencies, or adapt the gold standard etc. etc.

I do not claim to have any superior knowledge about how this will work out, but i want to point out some of the issues why I personally think that one should not take those “market pundits” too serious:

The very same in my opinion applies now to the Bernanke/Taper/end of QE discussion. Everyone is now a QE expert and knows exactly what will happen if it ends or if it continues.

I can only repeat what you can learn out of this events (funny, even the names are still the same…):

Lessons learned

The lessons of those episodes at least to me are clear:

1. No one really knows what is going to happen in the future, developments are never linear over a long period of time and disruptions (positive or negative) can happen more often than one imagines.

2. The “loudest” commentators are mostly people who make a living out of it (Roubini, Martin Wolf, Krugman etc.) or are talking their books (Bill Gross, El Erian, Kyle Bass etc.)

3. Crisis are always a catalyst for change. Structural changes take time and will not be recognized for a long long time

It’s funny that one of the loudest critics at the moment, Bill Gross from PIMCO is having a terrible month/year, under performing 88% of bond funds in 2013 with his Total Return flagship….

In the medium and long term, share prices do not care that much about QE but only about 2 things: Real Profits (and profit growth) against valuation. Forget all that shxx about liquidity driven stock markets, great rotation etc.

So the two important questions are: Will profits go up and down and is a stock expensive or cheap ? I do not have the answer, but interest rates are only a small part of that puzzle. Clearly, higher interest rates mean higher interest expenses for some companies, on the other hand, banks and insurance companies (and pension funds) profit from higher rates. So even this effect is not so crystal clear. Again, I do not know the answer, but whatever Bernanke does, it will be only a “catalyst” for underlying fundamentals. Not the other way round.

I am pretty sure that next year around this time there will be another “hot item” being used as an explanation for market movements. The reality is: No one really knows what really moves markets short term, but you have to fill a lot of Air time on television to explain it.

As a long term investor you should therefore concentrate on finding cheap securities where the profit is most likely not going down in the future. I fyou don’t find any, stay in cash. The rest should be viewed as pure entertainment.