Market Minute: Investors Assess Budget Battle; Auto Stocks Hum Along

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Investors assess the impact of the budget stalemate, and auto stocks are hitting on all cylinders. Those stories and more are what's in Tuesday's Market Minute.

The Dow Jones industrial average (^DJI) fell 128 points Monday, as the budget showdown rattled investors. The Standard & Poor's 500 index (^GPSC) and the Nasdaq composite index (^IXIC) both lost 10 points.

Despite the recent selling, the major averages still closed out the third quarter with solid gains. The Dow added 1.5 percent and the Nasdaq soared nearly 11 percent.

The last government shutdown -- back in 1995 -- led to small market losses. But in the month after the impasse was resolved, the S&P 500 rallied by 10 percent.
Detroit Struggles To Re-Build A Bankrupt City Amidst Poverty And Blight
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We're watching auto stocks today with monthly sales reports starting to roll in. Sales have been running at their best levels since before the financial crisis began, but we're expected slight declines for September -- partly because of a calendar quirk.

Meanwhile, stock prices have soared. General Motors (GM) is up 58 percent over the past year; Ford Motor (F) shares have jumped 71 percent; and luxury carmaker Tesla Motors (TSLA) has soared by more than 500 percent.

Also keep an eye on health insurers such as UnitedHealth Group (UNH), Aetna (AET), Wellpoint (WLP) and Humana (HUM), as consumers start to check out the plans available under the Obamacare exchanges.

%VIRTUAL-article-sponsoredlinks%Amazon (AMZN) is planning to add 70,000 jobs for the holiday shopping season. That's up from 50,000 last year. And Walmart (WMT) is planning its biggest ever warehouse, in Bethlehem, Pa., to fulfill online orders.

Shares of J.C. Penney (JCP) continue to slide. They closed Monday at $8.80 a share, their lowest level in more than 30 years. Penney is having trouble attracting investors and customers.

Facebook (FB) will soon allow users to search the site for status updates and posts. It will roll out the new tool slowly, first to a select group of users.

And Walt Disney (DIS) and Dish Network (DISH) have agreed to a short-term extension in their current round of talks, without blacking out any ESPN, ABC or other Disney-owned programming.

-Produced by Drew Trachtenberg.

If You Only Know 5 Things About Investing, Make It These
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Market Minute: Investors Assess Budget Battle; Auto Stocks Hum Along

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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