The Key to Making Money in the Market

 | Feb 26, 2013 | 3:00 PM EST
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After Monday's selloff, I found all the chatter on social media about the coming end of days amusing. With the market barely 2% off the recent highs, there was talk of a huge pullback in stocks and preparations for a potential crash-type move. It was, after all, the worst day in the market in three whole months. While people were tweeting and blogging about how hard they were looking at charts and keeping track of Asian indices, I was enjoying a nice glass of wine and a book and ignoring the overnight stock markets. I suspect some felt insulted that I disparaged those who were charting stocks at 11 p.m. on a Monday night.

But I am not naïve. Problems in Italy could certainly cause trouble for global stock markets. While the actual sequestration cuts in the U.S. are not that bad ($85 billion is about a week of spending in the $6 trillion budget and the equivalent of what is spent monthly to buy mortgage bonds), the lack of political will to prevent it is troubling. I wrote on Monday about how the economy is still in a state of "better but not good." Consumers are scared, job growth is anemic and a lot can go wrong in the stock market.

Last night was not the time to deal with these issues. The time was several weeks ago when the market was leaping forward every day. On the last day of January, I wrote about the need to review your portfolio and prune stocks that had reached overvalued levels. I have talked this year about hoarding cash as the market powered back to new highs. A correction was inevitable after the rally off the November lows. If you were just getting around to reviewing and planning last night, you were too late.

There was no need to stay up and watch Asian markets tick by tick last night unless you were massively long on 10x leverage. If you were, you may as well have gone back to sleep since there is about a 98% chance you will blow up anyway. I have known very few who could trade on massive leverage and survive. They are outliers. Any massive movement in Asia would be reflected in a gap opening here if it was really the start of a global crash. The odds that flipping through the same piles of stock charts as everyone else to find an edge strikes me as small.

Which brings me to a pet peeve: If you are fortunate enough to make a good living in the markets, please stop talking about how hard you work. While it takes discipline, mental acuity and perseverance to succeed, it is not hard work. No matter how late you stay up reading 10-Qs or running models, you do not work as hard as an elementary school teacher does. I don't care if you stayed up all night charting stocks, you don't work as hard as a person with a small business trying to make payroll and taxes. You could have watched every tick of every market in the world and not worked as hard as a heart surgeon or an ER nurse. The only way those of us in the market break a sweat is if we have either too much leverage or the air-conditioning fails. We are very fortunate to do what we do, and complaining about how hard we work is a tad insulting to those who really labor intensively.

All of the chatter about sleepless nights and feverish chart reading reminds me why I prefer the value approach to the markets. Some of my stocks went down Monday but the business value of the companies didn't change much. It forces me to be a contrarian, selling stocks that rally to the point of over-valuation, and be a buyer when the blood of the overleveraged-momentum types runs in the streets after a selloff. Market movements are just noise to a value investor unless they create severe valuation distortions.

The key to making money in the stock market -- and still sleep well at night -- is to react to market movements and not try to predict them. If the new round of messy news out of Europe causes a market correction, or even a crash, there will be bargains galore to buy and you should have cash on hand if you have been carefully pruning portfolios based on valuation in prior rallies. Don't wonder what the market is going to do tomorrow. Ask yourself if a stock is safe and cheap enough and has solid prospects to make money over the next five to 10 years.

Insisting on trading every day and reacting to every news item or twist of the tape makes investing a lot harder than it needs to be.

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