The “fiscal cliff” drama may be over, but many investors still wonder how the new deal will affect the economy — and their investments.
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Here’s a bit of advice to begin 2013: Ignore economic forecasts when it comes to investing in the stock market.
That might sound outrageous, since the subject seems to dominate the discussion, especially this year with all the fiscal cliff chatter. But the economy is not the stock market. You can have a lousy economy and a great stock market. And you can have a great economy and lousy stock market.
Take Greece, for example.
In 2012, the Greek market was among the best-performing in the world — up 33 percent. Yes, that Greece. The one you saw on TV with protesters in the streets with the molotov cocktails and tear gas. The country with unemployment north of 25 percent, a shrinking economy and crushing debts. Yet Greek stocks more than doubled the return of U.S. stocks last year. Meanwhile, the Greek economic crisis is ongoing.
Greece is an extreme case — its stock market was rebounding from recent lows — so perhaps it was just a lucky break for investors.
But there are many other examples, across different markets and time periods, when economies and markets have gone separate ways.
Warren Buffett knows this. He once looked at gross domestic product, a commonly used measure of economic growth, and pointed out that from 1964 to 1982, the U.S. stock market went nowhere even though GDP quintupled. But from 1982 to 1998, the stock market rose 20-fold while GDP barely tripled.
There are lots of reasons to explain market moves. The economy isn’t one of them. This is probably why the greatest investors aren’t economists.
Peter Lynch is one of those investors. He made his name as the pilot of Fidelity’s Magellan Fund from 1977 to 1990, where he racked up average returns of 29 percent a year. Lynch’s take on all this is best summed up by a now-famous quote of his: “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.”
Yet, I can’t tell you how many times I’ve spoken at investment conferences or given radio or TV interviews and had someone ask me about my economic forecast. Despite all the wisdom of the world’s greatest investors, many people insist on spending most of their time trying to figure out unknowable things — like what the economy is going to do. Maybe it’s not their fault, as the financial industry produces reams of this kind of stuff every year.
So, if trying to predict how the fiscal cliff will affect the economy is a waste of time, what should you focus on?
In a word: price.
The old saw on Wall Street is that good things happen to cheap stocks. In Greece, for example, you could have bought Metka, a Greek construction company. At the start of 2012, you would have paid less than four times trailing earnings per share. A comparable U.S. company might fetch four times that. The dividend yield was about 8 percent. This for a company with a 20-year history of turning a profit. Metka’s stock rose 64 percent in 2012.
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