Stocks: Where the Market Is Headed and How to Survive the Next Crisis

By Alex DUMORTIER, CFAFool.com

Stocks are rallying, posting a second day of solid gains on Thursday (so far). The Dow Jones Industrial Average and the benchmark S&P 500 are up 2.05% and 2.24%, respectively at 1:40 p.m. EDT.

Yesterday, I referred to one of the smartest, most rigorous finance bloggers out there. Heblogs anonymously at Philosophical Economics (and tweets from @Jesse_Livermore), but I'd put his work up against that of any overpaid Wall Street strategist.

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Today, I want to draw your attention to the work of another expert blogger, Prof. Aswath Damodaran of New York University,who blogs at Musings on Markets. If you're passionate about investing, you'll be doing yourself a huge favor by following both of them. If you're an investment professional, you'd be penalizing yourself if you aren't already doing so.

Source: What is the euro crisis? Re-published under a Creative Commons license.

Yesterday's column laid out 5 Rules to Achieve Happiness in a Bear Market, including "Nobody knows what the market will do next" and "Don't change investment tack in response to a "trading opinion."

In his latest blog post, Prof. Damodaran points out his own set of four rules to cope with a market crisis and they are very pragmatic, including:

This is extremely sensible. One of the most dangerous aspects of a financial crisis is not the fall in asset prices per se, but rather the emotional toll this takes on investors. Fear perverts our ability to think rationally; when we are under emotional duress, we are much more likely to sabotage ourselves by acting in a manner that we would otherwise find ludicrous. Reminding yourself of your investment philosophy is a good way to break that cycle.

And speaking of value and market prices, I contacted Livermore to get his estimate of fair value for the S&P 500. He responded:

At 1,980,the S&P 500 is now roughly 16% above that fair value estimate. As such, to obtain the expected 10-year annualized total return from current prices, you need to dock roughly one-and-half percentage points from the above estimates, leaving just 4.5% nominal/2.5% real. I imagine those figures are quite a bit lower than most investors' expectations.

Of course, the historical volatility of 10-year returns is significant, so investors could end up earning much better returns over the next 10 years. However, it seems unwise to count on that "positive volatility" to achieve your financial goals.

The article Stocks: Where the Market Is Headed and How to Survive the Next Crisis originally appeared on Fool.com.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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