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Ignore hype, keep eye on the ball in market

Posted online

by Peter F. Mackie

for the Business Journal

The Dow and Mark McGwire. What do they have in common? Plenty. Both are on a record-setting pace that has their followers mesmerized. Both are heroes caught in a frenzy of public adulation and confidence.

Both phenomena also pose the same danger. Records are not the ultimate measure of success. Winning is.

For the Cardinals and Mark Mc-

Gwire, it means a shot at the world championship. And Dow success should be measured only by the long-term gains scored by your own investments. Breaking 10,000 won't guarantee your investment success any more than a McGwire home-run record assures Cardinal victories.

The market averages are a measure of trends and a barometer of the health of the economy and the financial markets. However, they do not directly affect the investor's individual portfolio. The financial outcome is determined by what is actually owned in the portfolio, as well as the amount of concentration and risk accepted.

Successful investors stay close to their long-term targets. They do not make aggressive bets to time the market, stock or bond. Often, short-term market psychology encourages investors to do the opposite of what they should. Many investors thought the stock market was high in 1995 and went to high cash and bond positions. Headlines spoke about a 35 percent fixed income position when the Dow was at 5,000. We will never hear about those who did not recover and reinvest. Yet we know the money market fund balances continue to grow.

This stock market has been an earnings-driven market. Corporate America is internationally competitive and financially healthy. We have never had a generation of non-inflationary growth without a hot or cold war to distract capital and human resources from the competitive private sector. Who is to say what "normal" high and low price ranges should be in this new financial climate?

We do know there are large numbers of successful companies growing jobs and earnings. They are using capital and technology to leverage knowledge to create products for a global economy.

The stock market generally looks 12 to 18 months ahead. Investors make decisions on expected economic and business conditions. In uncertain times, some revert to cash. (Just because this is the observed behavior does not mean it is in your best interest to do the same!)

Market dips are seen as an opportunity to add to previous positions. The increased cash positions, mentioned above, act as a long-term stabilizing factor by providing investors the needed resources to "buy on dips."

Many more investors are and will be investing for their retirement. Baby boomers are beginning to experience fewer educational costs and are investing their new cash flows for the future. Alternative investments to stocks do not promise attractive long-term returns.

Years ago we had the prospect of passing through the Dow Jones 1,000. This mark was first approached in January 1966. Over the next 17 years the stock market approached the 1,000 level and only left it in December 1982. Although the general market averages made little progress for almost a generation, many long-term investors did quite well.

Industries making major moves included consumer goods, pharmaceuticals, selected computer manufacturers, oil and oil-service companies, radio and TV broadcasters, and tobacco companies.

Those investors who lost major value over this 17-year period had concentrations in autos, air transport, small-loan companies, discount retailers, and telephone and electric utilities. The economic environment then compared with today was terrible.

High inflation, rampant wage and benefit hikes, increasing raw materials costs and a culture of spend now before the price goes up. At that time the U.S. government was spending more than it received in taxes, hence deficit spending.

Today, we have a much healthier financial condition. Long-term investors who are careful and thorough in their research will own the companies that other investors desire.

Do not think about Dow 10,000. It's only 11 percent away. But the daily and weekly moves of the market are distractions. Focus on what is important to your own holdings. Think long-term and focus on what companies to invest in or what money manager you want.

In other words, ignore the hype and the roar of the crowd, and keep your eye on the ball, just like Mark McGwire has learned to do.

(Peter F. Mackie is president of the investment management group for Commerce Bank.)

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