Analyzing the Fiscal Cliff Outcome
With some amusement, our office gang watched the parade of pundits today.
In general the media focus was on everything that was wrong with the deal, mostly based on the idea that spending was not slashed. Those interviewed included nearly everyone who was wrong in predicting the actual outcome.
Imagine that ESPN interviewed all of those who called the Cowboys over the Redskins last weekend. "What is your next great call?"
Few of the analysts seemed to grasp the nature of compromise: Hated by all!
This is something that we have highlighted for months. Perhaps the problem is that so few people got it right, so the producers could not find good subjects for interviews. [Hint: Check here or here or here.]
The attention has smoothly shifted to the next challenge. For many mistaken investors, this makes them feel like they were right, even though the facts show otherwise.
The Investment Reality
Today's market rally was a minor rebound, when viewed in terms of the post-election levels. Put aside any notion of "chasing" and simply think about the fundamentals.
A few months ago there was a major challenge, something that might throw the economy into recession. It did not happen. Consider two possibilities:
- If you understood the political probabilities, you are already in the plus column.
- If you have been on the sidelines, you missed the bottom. So what? You need to have an open mind. Each day is a new opportunity. Forget that you did not buy the bottom. Even if your favorite stock is up a couple of points, it might still be a "buy."
Risk and Reward
Most investors consider price and only price. If they missed the bottom, they are paralyzed.
You had a chance to buy CAT at 89 or so on Monday or in the low 80's last week. That was with the fiscal cliff issue in front of us. Those who (incorrectly) thought this was a big risk were worried about CAT.
With that issue behind us, the risk/reward profile is different. The CAT upside is still in the 130 range based upon the long-term P/E multiple, but the downside is much more limited.
Even though CAT is now trading at 93.50, it is at least as attractive as it was last week, and maybe more so. It is one of the stocks that I am buying on Day One for new accounts.
The value of any investment includes both risk and reward. Despite today's rally in stocks, there is much less risk than there was a week ago.
When market worries change, you should adjust your risk/reward profile. Since you cannot go back and revisit last week's prices, it is better to analyze current values!