INVESTING: Machinations of stock market frequently defy logic

Wall Street is a tough place to figure out. One minute you’re up 8 percent or 9 percent for the year, the next you’re down 3 or 4. The last five years have been a little crazy. You may want to yell, “Hey, I’m not getting any younger. At some point, I want to retire!”

One of the challenging things about stocks is there are few rules you can follow to bring consistent returns year after year. Formulas and methods that work today often fail you in big fashion tomorrow.

Successful stock investing is the only thing I know of that doesn’t improve with greatly increased effort. With everything else I do in life, I experience more success the harder I work. With investing, sometimes I do great by doing nothing.

I’ll share a few points of frustration clients have voiced to me. These concerns stem from money the clients manage on their own or have placed with other managers. (I am not bragging; it’s a fact the market has been kind to me.)

One client thought he was diversified enough to make money all the time. Everything went down in October, and he couldn’t figure this out.

First of all, spreading money across a spectrum of asset classes does help limit your downside, but when you are in a bear market, it’s not a question of whether your investments will take a hit but when. Bear markets are brutal, and diversifying generally just gives you more losers to talk about.

Another client was confused why a stock he owns went down. The stock in question is a great company that had beaten its earnings estimate. But the stock got pummeled, anyway.

Investors have to differentiate between stocks and companies. Intel is a great company, but the stock has spent long periods murdering investors. Beating estimates is not always a sure thing for a higher stock price, especially if the market or industry is trending down.

Wall Street is two steps ahead at that point. If you want to make money, you need to be three steps ahead.

That leads me to the most common frustration for investors. For the most part, they can’t see a correlation between what they see in the world around them and what happens in the stock market.

Recently, a client and I were talking about Merck. I don’t see any way the company can navigate through all the Vioxx-related lawsuits and remain viable. But recent action in the stock perhaps says otherwise.

Of course, I thought that about the cigarette makers, too. The industry paid fines that would have bankrupted the European Union, yet Altria (formerly Philip Morris) just set a new all-time high. I’m telling you, logic just doesn’t seem to play a part.

The next bear market will start soon, if it hasn’t already. The market might stage a year-end rally, so short-selling could be risky the rest of this year. But the rally, if it happens, will be narrow and choppy.

If the S&P 500 does manage to surpass its Aug. 3 high of 1,246, it will be like playing Whack A Mole. Sellers will swoop in so fast your head will spin. Buying makes sense for only the nimblest of traders. Anyone else should look at rallies as opportunities to raise defensive positions.