February 23, 2010 - Let's see now. Consumers are more pessimistic this month than last month. The Dow Jones Industrial Average loses 100 points on the news. Unemployment is better in one month, worse in another. The DJIA goes up on the good news, down on the bad. Home Depot has a good quarter, raises its dividend, and forecasts a better year for 2010. The stock goes up 50 cents on a day when the market is down 100 points. Other stocks are light on revenues. They go down 10% or more.

So how do investors make good decisions in this much uncertainty?

First, they realize that volatility comes with the territory. Stocks and large indexes will move up and down, responding to specific news events. Indexes reflect a broad number of stocks so they will move on large, macro events, such as employment or inflation. Specific stocks react to macro events, if they are affected by them, but much more to specific items such as quarterly earnings reports. When they beat estimates, both revenues and earnings, usually, they go higher. When they fall short, they lose ground.

Second, investors do thorough due diligence on a stock and get comfortable with its history. How a stock acted in the past, through a crisis, either at the global level or specifically at the company, will help investors understand how well the company will do in the next crisis. There's no substitute for good research and a thorough knowledge of a company to help soothe anxious nerves when the market is crashing or a stock is falling because the whole market is doing poorly. There is great comfort in knowledge.

Third, investors have a larger time horizon than today's headlines. Yes, times were difficult the last 2 years. They still are for many people. But things are improving. Certain companies (Cisco, IBM, Home Depot, Google, Ralph Lauren, Nordstrom and many more) are doing much better, growing revenues and earnings in a tough environment. Eventually, the U.S. and global economies will rebound. Most likely never to the robust levels of the 90's, but they will recover from these levels and move higher. Human nature will propel them as new inventions, new efforts, and new capital evolve the current economic status back to a growth mode. Pessimists will say we have just begun. That the worst is yet to happen. They always come out when times are tough. They were wrong in the '30's and they'll be wrong again. They completely sell the American spirit short, always a dangerous thing to do.

The news is mixed right now, seemingly more so than usual. There are rays of sunlight through dark clouds, then they close, and the sun disappears, only to break through again somewhere else, only stronger. Eventually the clouds will diminish (never disappear), and investors will feel better. In the meantime, stay focused on specific stocks, read the news, and understand that volatility is part of the investing roller coaster. If the ride is too intense, then stay in CD's and treasuries. Being in the stock market means there will be up days and down days, depending on the messages.

Ted Allrich