Should This Market Trend Rattle Your Bones?


In March of 2000, equity funds saw their largest weekly influx in history. We're talking billions upon billions poured into betting on the tippy-top of the '90s tech bubble -- like a game of Jenga at the Buffett-Gates family picnic. This gave rise to what was eventually called the "lost decade" of equities investing. Now, fast-forward to the second week of 2012, when the market is riding a gain of nearly 70% since the initial dive of the financial crisis. During this week, equities saw the second-largest inflow of cash ever -- a total of more than $22 billion. Many are familiar with the mantra, "Be fearful when others are greedy and greedy when others are fearful." With that in mind, what does the staggering interest in stocks mean for the direction of the market and your portfolio?

Yes, I know -- it sounds like Donald Rumsfeld wrote the opening paragraph. But, hey, a little caution goes a long way. And I am not about to suggest that you initiate Operation Shock and Awe on your retirement fund.

Truthfully, you should consider the fact that after years of hearing about investors' fear and hesitance to enter the equities markets, the collective "we" has suddenly decided to throw caution to the wind and surf this invincible wave of profit. And for that matter, there are (arguably) some bubbles out there that may be overdue for a downsize. I'm talking about restaurants that trade at 30 times earnings and cloud data companies that have negative earnings and no moat but that somehow price at unfathomable premiums. Mr. Market is as neurotic as ever. So again, we ask: Is this market becoming overcrowded, and are we due for a correction like the one we saw begin 13 years ago?

I will now delight in disappointing many of you by giving no such answer. As far as I am concerned, this so-called "market" is wholly irrelevant to the world of investing. If you were to buy a small business tomorrow, would you go to the small-business market, wheeling a cart among old ladies, Wall Street traders, and high-speed trading supercomputers? Unlikely. You would (I hope) identify a business you like -- one that makes sense to you and isn't overpriced. Forget this market and let its legions of followers ride the rollercoaster of stress into oblivion.

How do you do this? First, give up on that popularity contest. Stop looking at Apple, trying to figure out if it will turn around from its current funk. You are one of millions looking at that stock -- some smarter and more able than you are and others much, much worse. Don't pay attention to any IPO. Sure, some will succeed, but it won't be based on fundamentals, and, more than likely, you will choose the one that dives. Your key to disregarding and beating the market is to turn your attention to the nooks and crannies of the public-company universe, and then just add a good dose of common sense and some eighth-grade-level math. Voila -- you're an expert investor.

A clue?
Let's pretend we're looking in the classifieds sections for a business for sale. The kinds of businesses you find in the back of the newspaper are not sexy, compelling, Apple-esque companies. It's a sad day for our childhood fantasies but a great one for our retirement.

Looking down the column, we see one that manufactures HDD storage. How "2000" of them. It's called STEC . Wall Street generally hates these types of companies because of the decline in PCs and the fact that, like most aging businesses, they aren't growing like they were just a few years ago. The result is a deeply discounted manufacturing company.

But here's some appealing info: Though STEC is affected by the PC apocalypse, it's still a free-cash-generating business. In addition to that, the founder and CEO have decided to lower their salaries to $1 during these hard times. Sure, they are already extraordinarily rich, but it still looks good. Insiders own a collective 23% of the company, so you know incentives are there to pick things up.

As far as the sustainability of the business is concerned, I imagine the tremendous build-out of enterprise storage and infrastructure support for this whole "cloud" thing will graciously allow these companies to exist a little while longer. At the end of the day, this business has $186 million in cash -- nearly 78% of its market cap. This implies that if you shut off the valves tomorrow, STEC's operating business is worth $52.6 million. In its last reported quarter, the company sold more than $40 million worth of goods. Using that dash of common sense we talked about earlier, you can see how this unloved, uninteresting business can make you money regardless of whether the debt ceiling is raised in time or how loud Rick Santelli can yell at you from the floor of the Chicago Stock Exchange.

Here's a secret
The financial-services industry separates us from the know-nothings and the know-everythings. It strives to make sure there is no in-between. But you don't have to be the next Damadoran valuation genius or an options expert to do well in investing. More importantly, it doesn't matter if the market is going up, down, or sideways. When you buy a good business at a great price, you've separated yourself from the machine. Just sit back and watch your small neighborhood business write you checks for years to come.

For more on the HDD business...
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