Are you confused about stocks? You are not alone.

 Confusion reigns!

As part of my work I speak with smart people from differing backgrounds:

  • Individual investors — clients and potential clients;
  • Business leaders — colleagues on corporate boards;
  • Leading economists and journalists — both groups well-represented at the recent Kauffman Conference;
  • Colleagues in the blogging world.

There is an interesting pattern.  Most of them feel more confident about their personal circumstances, but they are worried about everything else.  When it comes to the stock market, the fear is palpable.

Even the pros are struggling to get a handle on this market.  Readers know that I love Art Cashin.  A good friend gave me an autographed copy of his book.  I have been reading his daily wisdom since I started in the business in 1987.  He really does have the pulse of the NYSE floor.  When Art says that the normal yardsticks are not working, we should all pay attention.


If Art and the NYSE traders find the market confusing, the rest of us are in good company!

Finding Clarity

There are two perspectives — trading and investing — with differing time frames.  I explained this here, and I encourage everyone to read it as background.

The traders must deal with all of the issues Art Cashin raises.  Our Felix model finds it all confusing, and has sent all of our 28 trading sectors to the penalty box.  Felix realizes that traders should not press when confidence is low.

The investor perspective is more interesting.   My email and comments suggest that the most helpful work I have done relates to explaining something called "the wall of worry."

When I first saw this term, I confess that it seemed rather silly.  As an academic who began an investment career with some basic confidence in the efficient market hypothesis,  I  expected fresh information to be quickly reflected in market prices.

I soon learned that this was not true.  Warren Buffett (one of my heroes, and we all wish him the best) put it well when he said, "I’d be a bum on the street with a tin cup if the markets were always efficient.”

This meant that an astute investor could beat the market, but it required better methods.

The single biggest source of investor profit relates to evaluating what many call "market fundamentals" and others call "headwinds."

A List of Worries

Here is a list of worries for your consideration:

  • ETF liquidation doomsday scenario
  • Flash crash — and overall worries about market manipulation
  • Bush-era tax cut expiration
  • Collapse of the euro and/or European Union
  • The Hindenburg Omen
  • Increase in US budget deficits
  • Ominous head-and-shoulders pattern in market averages
  • Dow 5000
  • Dow 2000
  • Dow 1000
  • The collapse of the US consumer
  • The double-dip recession
  • Sell in May
  • Sell in October
  • Sell, Mortimer, Sell  (OK, I sneaked that one in for those who know).
  • The BP spill
  • Fear of Obama
  • Obamacare
  • Weakness in the dollar
  • Strength in the dollar
  • Weakness in China's economy
  • Strength in China, leading to higher rates
  • Korea
  • Iran
  • Initial claims spiking to over 500K
  • Initial claims falling, but results skewed by seasonality
  • Shadow housing inventory
  • Foreclosure robo signing
  • Overstated and exaggerated corporate earnings
  • Fed blunders — QE II
  • High frequency trading
  • Worldwide collapse and deflation
  • Worldwide hyperinflation

If some of these seem a bit outdated, you are reading carefully.  The list is from December, 2010.

It is a good look back on the history of worries.  Readers should note that worries and headwinds are not quantified.  Anyone can deal in words and anecdotes.  It requires some expertise to include data.  Those of us who have been data-driven have beaten the anecdotal crew by a wide margin.

Current Worries

Let us turn from the old list to the most important issues raised by current market skeptics.  Dick Green at examines the most important "bearish arguments to ignore."

Dick hits a number of themes that will be quite familiar to regular readers of "A Dash."  Here is his list:

"The Bearish Arguments That Are Wrong

Three of the most persistent bearish arguments were highlighted in a recent article on a major financial web site. 

The arguments are:

1)      Market valuations as measured by Price/Earnings (P/E) multiples aren't low.
2)      The 10-year Shiller P/E shows stocks overvalued.
3)      Profit margins are high and using a "normal" profit margin shows stocks are overvalued."

I strongly urge readers to check out his article.  He explains that these methods are backward-looking, do not reflect interest rates, and assume that margins will mean revert without any corresponding change in employment or gross revenue.

As I said — arguments familiar to  (and profitable for) readers of "A Dash."

A Final Thought

If you are an investor who is not mesmerized by fear, you will be able to join me in doing two things:

  1. Finding stocks that  have strong anticipated earnings and cash flow.
  2. Finding stocks with strong dividend yield.

The Wall of Worry is a difficult concept to explain, and even tougher to appreciate in real time.  The daily stories seem so tangible — often augmented with TV video.

For a free education on this topic, you could dip into my archives.

For those in agreement on the economic theme and Europe, I like JP Morgan Chase (JPM), Caterpillar, Inc (CAT), Aflac (AFL), and Oracle (ORCL).

The dividend yield concept is more challenging, since I have an ever-changing roster of great dividend stocks where we sell calls to enhance the yield. Intel (INTC) and Abbot (ABT) are among the recent choices.


You may also like


  • Redrut April 18, 2012  

    I hadn’t thought about it but the arguement relating to profit margins is a very interesting breakdown of a misconception that even I held.
    Obviously companies aren’t simply going to cut their prices or suddenly pay more for their inputs OTBE but what is curious is how we got there in the first place.
    I was thinking about the law of diminishing returns with regards to production, ie the first x amount of goods is the easiest to produce and once you expand the business and incur extra costs, your marginal profit decreases. Maybe the total quantity has reduced so much that most companies have been able to streamline operations to make them the most efficient.
    Thanks for the thoughts!!

  • Pacioli April 18, 2012  

    “Those of us who have been data-driven have beaten the anecdotal crew by a wide margin.”
    Have you really? Where is the data?
    “Anyone can deal in words and anecdotes. It requires some expertise to include data.”
    I am not raising substantial doubt as to your claim; simply requiring the verification via data prior to acknowledging the claim.

  • oldprof April 18, 2012  

    Pacioli — I have read your comment three times and I still don’t understand it.
    The basic idea is that stocks are driven by earnings growth, which has been excellent for several years. Those who understand this concept and use it have done pretty well, no matter what they have bought.
    The parade of pundits on TV and in print that glide from topic to topic, always telling you what to worry about, have helped to create the Wall of Worry — more reasons to be afraid.
    To prove this, follow the links I gave in the post and compare with a stock chart:)
    I hope this gets at your question.

  • Simeon Beer April 18, 2012  

    Earning are yesterdays news.You are gambling that the growth will continue. As justin Mamis says in his book on risk,the higher the advance the greater the risk as great expectations are built into the higher price

  • Pacioli April 18, 2012  

    Indeed, following the links does show that many pundits have enumerated the worries that characterize the investment landscape. I have no dispute with this (and I had already seen most of your links – I am a frequent reader).
    The point of my comment was that in your post you make the assertion that “Those of us who have been data-driven have beaten the anecdotal crew by a wide margin.”
    But nowhere in your post do you demonstrate that these pundits, despite being less data-driven, have actually accumulated inferior investment records relative to your own. In fact, you do not even provide any reference point as to your own record. And so the claim itself seems wrought with the same vagueness for which you decry the ‘pundits’ in your post.
    Again – “Anyone can deal in words and anecdotes. It requires some expertise to include data.”
    I guess I’m raising the possibility that just because some of these folks do not have time to thoroughly describe their methodologies and strategies within the 5 minutes of air time allotted, does necessarily mean that the actual investment strategies they are implementing are devoid of data. And again, if they are devoid of data, you are not supporting the notion that their actual results achieved are in any way inferior.

  • real asset investing April 18, 2012  

    Personally, I happen to believe that future inflation is the problem. Here in the UK, we’ve had inflation of 3pc or above for 28 months straight. I blame the BOE’s QE for this. For now, most of the QE “proceeds” are sitting on the balance sheets of banks, but at some point it will hit the real economy. I guess stocks will hold up better than bonds in that scenario, but in this non-expert opinion, it still seems like a legitimate concern.

  • oldprof April 19, 2012  

    Pacioli — OK, I get it. You are questioning a general conclusion that seems obvious to me and you want some kind of analysis of pundits — something that would be nice to have, but you and I cannot do.
    If you sat with me in my office, I could persuade you. I would stop the TIVO and tell you what some guy was about to say, because I know his story — he is selling fear, bonds, a political candidate, gold, or something similar. Or he is just entertainment.
    He is not rewarded for providing sound investment advice.
    It would be great if the media provided track records on failed predictions. Meanwhile, neither of us can produce data for some amorphous group of pundits, many of who do not even directly manage investments.
    As I frequent reader you know that I do not manage a single fund, but a number of different programs. I cannot advertise results online, but I am happy to provide information and discuss with interested investors. Each person gets a customized program.
    I’ll try to sharpen up this point in the book version, but I cannot do more here. If anyone chooses to believe that these guys get on and spend their five minutes talking about, for example, the imminent collapse of Europe, and then they are secretly going long the US market, well then they are not using their allotted time very effectively.
    One of my main themes is to focus on data, not stories. Those who understand this, and the wall of worry concept, are well on the way to improving their results.