Market Minute: Samsung Warns on Profits; Martha Stewart Takes a Pay Cut

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Investors return from the holiday in a good mood, but today's session all about jobs. The nation's economy and more are what's making business news Friday.

The Dow industrials (^DJI) rose 56 points in Wednesday's abbreviated session, while the S&P 500 (^GPSC) added a point and the Nasdaq (^IXIC) gained 10.

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Samsung, the world's largest maker of smartphones, is warning its profit this quarter will fall short of expectations -- indicating that sales of its new Galaxy 4S phone are disappointing. That could put even more pressure on the shares of rival phone-makers Apple (AAPL) and BlackBerry (BBRY), which have already seen their share price skid recently.

We're keeping an eye on Exxon (XOM), BP (BP), Chevron (CVX) and other oil stocks. Crude oil prices are holding above $101 a barrel, largely because of the turmoil in Egypt and unconfirmed reports that it has declared a state of emergency in the Suez region. Egypt controls the Suez Canal, a key transit point for oil shipments.

Boeing Co. (BA) says it delivered 13 percent more planes in the second quarter of this year than it did a year ago, as it resumed deliveries of the 787 Dreamliner. Boeing shares have gained 36 percent so far this year.

A pair of judges has approved JPMorgan Chase's (JPM) proposed $546 million settlement with customers of MF Global's failed broker dealer unit. This comes a week after federal regulators filed suit against Jon Corzine, the former chief executive of the failed commodities brokerage firm.

Martha Stewart has agreed to take a pay cut. The company that bears her name -- Martha Stewart Living Omnimedia (MSO) -- says her base pay will be slashed by 10 percent to $1.8 million, as it tries to end a string of losses.

And Restoration Hardware (RH) is bringing back Gary Friedman as chairman and co-CEO, less than a year after he was forced out. He left following allegations of an inappropriate relationship with a former employee.

-Produced by Drew Trachtenberg

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Market Minute: Samsung Warns on Profits; Martha Stewart Takes a Pay Cut

Warren Buffett is a great investor, but what makes him rich is that he's been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.

Most people don't start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That's unfortunate, and there's no way to fix it retroactively. It's a good reminder of how important it is to teach young people to start saving as soon as possible.

Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That's really all there is to it.

The dividend yield we know: It's currently 2%. A reasonable guess of future earnings growth is 5% a year. What about the change in earnings multiples? That's totally unknowable.

Earnings multiples reflect people's feelings about the future. And there's just no way to know what people are going to think about the future in the future. How could you?

If someone said, "I think most people will be in a 10% better mood in the year 2023," we'd call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.

Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012. That's great! And they didn't need to know a thing about portfolio management, technical analysis, or suffer through a single segment of "The Lighting Round."

Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return -- still short of an index fund.

Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it's not like golf: The spectators have a pretty good chance of humbling the pros.

Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time -- every single time -- there's even a hint of volatility, the same cry is heard from the investing public: "What is going on?!"

Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.

Since 1900 the S&P 500 (^GSPC) has returned about 6% per year, but the average difference between any year's highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.

Someone once asked J.P. Morgan what the market will do. "It will fluctuate," he allegedly said. Truer words have never been spoken.

The vast majority of financial products are sold by people whose only interest in your wealth is the amount of fees they can sucker you out of.

You need no experience, credentials, or even common sense to be a financial pundit. Sadly, the louder and more bombastic a pundit is, the more attention he'll receive, even though it makes him more likely to be wrong.

This is perhaps the most important theory in finance. Until it is understood you stand a high chance of being bamboozled and misled at every corner.

"Everything else is cream cheese."
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Markets

S&P 500 2,259.53 13.34 0.59%
DJIA 19,756.85 142.04 0.72%
NASDAQ 5,444.50 27.14 0.50%
DAX 11,203.63 24.21 0.22%
HANG SENG 22,760.98 -100.86 -0.44%
NIKKEI 225 18,996.37 230.90 1.23%
USD (per EUR) 1.06 -0.01 -0.57%
USD (per CHF) 1.02 0.00 0.12%
JPY (per USD) 115.38 0.02 0.01%
GBP (per USD) 1.26 0.00 0.03%

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