One of the greatest sports movie ever made was Hoosiers, starring Gene Hackman as Norman Dale, a basketball coach. Perhaps you have seen it. What follows is one of Norman Dale’s key speeches1 and I reproduce it here because it is crucial to your response to what is going on in the markets right now:
‘There’s a tradition in tournament play to not talk about the next step until you’ve climbed the one in front of you. I’m sure going to the State finals is beyond your wildest dreams, so let’s just keep it right there. Forget about the crowds, the size of the school, their fancy uniforms and remember what got you here. Focus on the fundamentals that we’ve gone over time and time again. And most important, don’t get caught up thinking about winning or losing this game. If you put your effort and concentration into playing to your potential, to be the best that you can be, I don’t care what the scoreboard says at the end of the game. In my book, we’re gonna be winners! Okay?!’
Ignore the stock market
An important article in the Feb 7th New York Times by Neil Irwin2 entitled Ignore the Stock Market, The Economy Looks Fine says it all.
Subtitled Economic data and the bond market are painting a more optimistic picture than the Dow Jones average, the piece opens with the following observation:
‘What is the stock market telling us with its precipitous drop over the last several days? In all likelihood, not much of anything.’
Mr. Irwin added: ‘The 8.5 percent drop in the S & P 500 through Monday’s close (before a 1.7 percent rebound on Tuesday) could signify the onset of a global recession. But it could just as well mean only that some trading algorithms at a big hedge fund collided in weird ways.’
What really matters
Mr. Irwin went on to say – I’m paraphrasing him here – you have to look at what really matters.
For what really matters — namely the durability of the economy and the capacity for individuals and companies to prosper in the years ahead — you have to look at the fundamental economic data, especially those that tend to be leading indicators.
Mr. Irwin added that the bond market and other financial market indicators are more credible measures of investors’ expectations than stock prices. Then he wrote: ‘The stock market can, when looked at in concert with these other indicators, provide some useful insight. Right now it appears to be more noise than signal.’
What would Warren Buffett do?
Under the circumstances prevailing right now, it probably does no harm to take some clues from Warren Buffett3 – someone who has seen it all and weathered virtually every storm the stock market has thrown at him.
Advises Mr. Buffett:
- ‘Games are won by players who focus on the playing field—not by those whose eyes are glued to the scoreboard.’
- Don’t let ‘the capricious and irrational behaviour’ of stock prices make you ‘behave irrationally as well.’
- ‘Forming macro opinions or listening to the macro or market predictions of others is a waste of time.’
- Don’t go into stocks ‘at a time of extreme exuberance’ and avoid becoming ‘disillusioned when paper losses occur.’
- ‘Ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.’
The best way to make sense of stock market volatility is to think of it as a sideshow to the broader trajectory of the Canadian, the U.S. and the global economy – all of which look fundamentally fine.
Dave Ritcey, The Ritcey Team, Scotia Wealth Management