After Market: Calm Optimism as Stocks Hold Steady, Gold Sinks Below $1,200

Stocks took a breather Thursday after racing higher on Wednesday, and the price of gold sank to a three-year low. The major averages ended mixed -- and that's good news, as the market mostly held onto the huge gains that followed the Federal Reserve's taper announcement.

The Dow Jones industrial average (^DJI) edged up 11 points, the Standard & Poor's 500 index (^GPSC) slipped a point, and the Nasdaq composite index (^IXIC) fell 12 points.

But the price of gold slumped by $39 an ounce, closing below $1,200 for the first time in more than three years. Gold related stocks followed suit. Newmont Mining (NEM), Barrick Gold (ABX) and Goldcorp (GG) all fell about 1.5 percent.

Another story getting lots of play today is Target's (TGT) announcement that as many as 40 million credit and debit card customers may have had their account information stolen over the past few weeks. Target shares fell 2 percent.

Even though earnings season is still a few weeks away, earnings news was a big factor today.

On the upside:
  • Oracle (ORCL), up 6 percent. The software maker beat Wall Street profit and revenue estimates.
  • Food giant ConAgra (CAG), up 5 percent, after topping expectations.
  • And Pier 1 (PIR), also up 5 percent. Net slightly missed, but the retailer raised its dividend by 20 percent.

On the downside:
  • KB Home (KBH) lost 6 percent. Despite this years housing boom, the stock is now flat compared to a year ago.
  • Rite Aid (RAD) fell 10 percent as the drug store chain lowered its outlook for next year.
  • Winnebago (WGO) slid 14 percent, even though net jumped.
  • And Darden Restaurants (DRI) lost 4 percent. Net fell from a year ago, but the big news was the company's plan to sell or spin off its Red Lobster unit. That dragged on other restaurant chains. Cheesecake Factory (CAKE), Buffalo Wild Wings (BWLD) and Cracker Barrel (CBRL) all lost about 2 percent. Dine Equity (DIN) fell 1.5 percent.

What to Watch Friday:
  • The Commerce Department reports final revisions for third quarter gross domestic product at 8:30 a.m. Eastern time.
These major companies are due to release quarterly financial statements:
  • BlackBerry (BBRY)
  • CarMax (KMX)
  • Finish Line (FINL)
  • Navistar International (NAV)
  • Walgreen Co. (WAG)
-Produced by Drew Trachtenberg.

If You Only Know 5 Things About Investing, Make It These
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After Market: Calm Optimism as Stocks Hold Steady, Gold Sinks Below $1,200

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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  • DJI28335.57-28.09-0.10%
  • NIKKEI 22523516.5942.320.18%
    Hang Seng24918.78132.650.54%
  • USD (PER EUR)1.190.00420.36%
    USD (PER CHF)1.110.00340.31%
    JPY (PER USD)104.72-0.1200-0.11%
    GBP (PER USD)1.30-0.0042-0.32%

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