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The surprising lessons of the 2012 stock market

A trader works floor New York Stock Exchange New York Wednesday Jan. 2 2013.   The “fiscal cliff” compromise

A trader works on the floor at the New York Stock Exchange in New York, Wednesday, Jan. 2, 2013. The “fiscal cliff” compromise, for all its chaos and controversy, was enough to send the stock market shooting higher Wednesday, the first trading day of the new year. (AP Photo/Seth Wenig)

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Updated: May 3, 2013 12:15PM



What were you thinking this time last year, when you evaluated and planned the investments in your 40l(k) plan or your other stock investment accounts for the year ahead? Did you anticipate the stock market, as measured by the Dow Jones industrial average, would have a 10.24 percent total return in 2012, including an average dividend yield of 2.74 percent? Or that the S&P 500 stock index would post a 13 percent return in 2012?

If you didn’t guess correctly, you have a lot of very good, very professional company. A new report from Goldman Sachs says that 88 percent of hedge fund managers failed to beat the S&P 500 index last year, posting an average return of just 8 percent. And that average masks some very big losers!

Let’s make it a little easier by choosing a shorter time period. As Congress wrangled to a standstill on New Year’s Eve, did you imagine the Dow closing Friday at 13,435, a gain of 497 points in just the four trading days during which Congress embarrassed us? Or that by the end of last week the Dow would be less than 600 points from its all-time high of 14,164.53 on Oct. 9, 2007?

As you watched the crisis in our Congress, did you imagine that just four trading days later, the S&P 500 would post its best closing high since December 2007 — the start of the financial crisis?

Yet all of those things have happened, despite the national lament over our political process. All of this makes the point that the stock market may “predict” the future, but it is not bound to the present. While we watched television and read the news about our country’s financial woes, the stock market had already priced in the current events — and was looking forward to the future.

Either the market was “pricing in” a deal that would be forged to allow the economy to continue to grow — or the likelihood that no really significant spending deal would be reached, forcing the Fed to create more money and credit to keep the economy going. That’s the money that has flowed into the stock market in recent months, instead of being used to hire new employees or expand businesses.

But the stock market doesn’t “care” why it is going up — nor should you. It may not make sense to you at the moment. And there’s an old saying that the market always fools the greatest number of people. That’s why you need to understand stock market history, make a sensible investment plan, and then have the discipline to stick to that plan.

A market of stocks

Was it any easier to pick individual stocks in 2012 than to forecast the direction of the entire market? Some smart money investors made a fortune, as even some “stodgy” Dow stocks had huge gains. The leading individual contributor to the Dow in 2012 was Home Depot (HD), which added 151.31 of the total 886.58 in index points gained on the year. The greatest individual detractor was McDonald’s (MCD) dragging down the DJIA by 91.38 points, according to S&P Dow Jones Indices.

Did you invest at this time last year thinking that among the best performing stocks for 2012 would be the following:

† Pulte Group (PHM), up more than 200 percent, from a low of $6.37 in early January 2012, to above $19 per share this January. The homebuilder benefitted from the anticipated rebound in housing.

† Whirlpool (WHR), which more than doubled in 2012 from a Jan. 4, 2011, low of $47.72 to its current price of nearly $107 per share as a rebound in consumer spending helped this appliance maker.

† Bank of America Corp (BAC) was the worst-performing bank stock in 2011 and the worst-performing stock in the DJIA. It reversed course in 2012, starting the year at $5.62 last January, then rising to a current $12.15 a share.

Here’s the thing about picking individual stocks: At the bottom and at the top, for every buyer there is a seller. That means someone is kicking himself, or herself, for selling Bank of America at $5.62 a share. And last week someone decided that price was “high enough” and sold out — to someone who was willing to buy at that price, believing that the stock would move even higher.

An even better example is the debate over Apple. Highly regarded analysts stand on either side of the question of whether this is the right time to buy — or not too late to sell — this popular stock.

Sorting that out can drive you crazy. That’s why this is a good time of year to remember who you are and what your investment goals are. If you’re not a “trader,” then you don’t have to worry about your investments on a daily basis. If you’re investing for the long term, then you can’t agonize over daily moves.

And you can never think that the market is “too high” or “low enough” to make an investment. If the pros can’t pick the tops and bottoms, why should you try? Just stick to your plan of regular investing. That’s the perfect investment resolution for the New Year.

And that’s The Savage Truth.

Terry Savage is the Chicago Sun-Times’ nationally syndicated financial columnist, and a registered investment adviser.



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