Market Minute: Smith & Wesson Earnings Shoot Up; Heineken Has a Flashy Idea

A gunmaker's profit shoots higher, and sluggish beer demand inspires innovation. Those and more are what's making business news Wednesday.

The Dow industrials (^DJI) recovered 100 points Tuesday, after several days of heavy selling. The S&P 500 (^GPSC) gained nearly 15 points and the Nasdaq (^IXIC) rose 27.
nyse stock exchange traders stock market preview earnings
Richard Drew/AP

Smith & Wesson (SWHC) says its quarterly earnings more than doubled from a year ago. Demand for firearms soared as the debate over gun control heated up following the shooting in Newtown, Conn., last year. Even though the gunmaker has expanded production, it says it can't keep up with demand.

But demand for beer has gone flat -- so beer-makers are going high tech. According to The Wall Street Journal, Heineken is developing a bottle that produces a strobe light effect as it's consumed, lights up when clicked with another bottle and flashes to the beat of music. Anheuser-Busch InBev (BUD), SAB Miller and other brewers are also working on some tech gimmicks to encourage social drinking.

Lorillard (LO) has won federal approval to sell two new cigarette brands -- new versions of non-menthol Newport. It's the first approval by the Food & Drug Administration since it was given the authority to do so in 2009. The FDA also turned down four other applications for new cigarettes.

Microsoft (MSFT) today offers a glimpse at Windows 8.1. The free update aims to fix some of the glitches and complaints about the original version of the operating system introduced eight months ago.

General Mills (GIS) quarterly earnings met expectations, but the food maker's outlook for the rest of the year was a bit disappointing.

The for-profit education firm Apollo Group (APOL) posted a 40 percent earnings decline, as enrollment fell. But the parent of the University of Phoenix did raise its outlook for the full year.

And oil giant BP (BP) has placed full page ads in several leading newspapers as it challenges some of the potential payouts in the wake of the 2010 oil spill in the Gulf of Mexico. The company says it's trying to avoid payouts to businesses that didn't suffer any spill-related losses.

-Produced by Drew Trachtenberg

If You Only Know 5 Things About Investing, Make It These
See Gallery
Market Minute: Smith & Wesson Earnings Shoot Up; Heineken Has a Flashy Idea

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."
Read Full Story
  • DJI26770.20-255.70-0.95%
  • NIKKEI 22522492.6840.780.18%
    Hang Seng26719.58-128.92-0.48%
  • USD (PER EUR)1.120.00000.00%
    USD (PER CHF)1.020.00010.01%
    JPY (PER USD)108.350.00000.00%
    GBP (PER USD)1.300.00000.00%