Money Minute: Stocks Soar to Record Highs; Fraudsters Target Target

Stocks are at record highs after one last Bernanke inspired rally, and Target was just that -- the target of thieves.

Fraudsters Target Target
Jeff Chiu/AP
Target (TGT) says as many as 40 million of its customers may be victims of a credit and debt card information theft that starting on Black Friday weekend. The scam apparently involved tampering with the computer software that controls the machines used to swipe credit cards at check-out counters. The data heist doesn't appear to involve online purchases. So, if you've shopped at Target stores in the past three weeks, you're urged to carefully check your statements online, starting today.

Outgoing Fed Chairman Ben Bernanke gave a final gift to investors, by finessing the taper of the Fed's stimulus program and promising to keep interest rates at very low levels for an extended period -- probably well into 2015.

That sent the Dow and S&P 500 to record highs. The Dow Jones industrial average (^DJI) soared 292 points Wednesday, the Nasdaq composite (^IXIC) rose 46 and Standard & Poor's 500 index (^GPSC) gained 29 points.

One sector of the market that struggled Wednesday was tech stocks, but they could gain some momentum today following some upbeat earnings news from Oracle (ORCL). The software maker beat Wall Street profit and revenue estimates.

You've heard for years that Warren Buffett is a financial genius, a guru for other investors. But really, how good is he? Well, according to a study by Wealth-X and UBS (UBS), the Oracle of Omaha has made about $37 million a day. That's a gain of about $13 billion for the year, a better performance than all of the other billionaires in the world. The Berkshire Hathaway (BRK-A) (BRK-B) CEO's reputation is indeed well deserved.

Delta Air Lines (DAL) and JetBlue Airways (JBLU) say they won't allow in-flight mobile calls, even if regulators clear that for takeoff. Delta says the decision follows negative comments from customers and employees. But, if the Federal Communications Commission allows it, Delta will permit fliers to use texting and email.

-Produced by Drew Trachtenberg.

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Money Minute: Stocks Soar to Record Highs; Fraudsters Target Target

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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