“Rules are Rules?!” (An email from Grandma)
by Jeffrey Saut, Chief Investment Strategist, Raymond James
September 27, 2010
The Good news:
It was a normal day in Sharon Springs Kansas, when a Union Pacific crew boarded a loaded coal train for the long trek to Salina.
The Bad news:
Just a few miles into the trip a wheel bearing became overheated and melted, letting a metal support drop down and grind on the rail, creating white hot molten metal droppings spewing down to the rail.
The Good news:
A very alert crew noticed smoke about halfway back in the train and immediately stopped the train in compliance with the rules.
The Bad news:
The train stopped with the hot wheel over a wooden bridge with creosote ties and trusses.
The crews tried to explain to higher-ups, but were instructed not to move the train!
They were instructed Rules prohibit moving the train when a part is defective!
REMEMBER, RULES are RULES!
(Don't ever let common sense get in the way of a good disaster!)
Click here to enlarge
Hard and fast “rules,” I have argued against them since entering this business some 40 years ago because in the stock market you have to be flexible. The reason for flexibility is that markets tend to be driven by, “fear, hope and greed only loosely connected to the business cycle.” I used to get into arguments with finance professors about this point. While it’s true over the long run investing is all about earnings, many investors lose money in the short/intermediate term (even if earnings are improving) adhering to that “it’s all about earnings” rule because sometimes Mr. Market decides “he” is unwilling to put a high price earnings multiple (PE) on those earnings. For example, if you bought McDonalds stock (MCD/$75.10) in 1972, earnings increased for the next 10 years. In fact, McDonalds never had a down sequential quarter over that timeframe, still shareholders lost money for nearly a decade because Mr. Market was unwilling to capitalize that improving earnings stream anywhere near the PE multiple he was willing to pay in the early 1970s. To be sure, in the short/intermediate term, the stock market is, “fear, hope and greed only loosely connected to the business cycle!”
