The Market Is More Irrational (and Profitable) Than Ever

Over the course of the last year, the market's overdramatized upswings and downswings have frightened a record number of investors out of equities. The New York Times recently cited a Gallup poll that found only 53% of Americans are, in one way or another, involved in the market. That's the lowest number since Gallup began tracking the statistic in 1998. All of this should mean one thing to the diligent long-term investor: Your time has come.

Death of equities?
Should Businessweek rerun its 1979 cover story with the headline above? Probably. The last time they ran it, it took the market only a few years to have a triple digit gain.

Those who ride the waves of Jim Cramer's verbal blitzkrieg are doing it wrong. When a company is all over the news, it's time to do absolutely nothing about it. Buying or selling the S&P popularity contest is playing right into Mr. Market's schizophrenic dream world.


There is a lot of chatter out there about how it's impossible to compete with the Wall Street big-wigs. That's like saying it's impossible to win a drinking contest with Clint Eastwood. Of course it's impossible! So why are you playing that game? Move on to the next table -- your table. Let the quants run around in the basements of Wall Street chugging Red Bulls so they can stay a millisecond ahead of the game.

This may be the best time to be a long-term investor since the introduction of canned beer.

We've come a long way
In Warren Buffett's earlier, double-digit returning years, you had to trek all the way to the SEC to do your stock homework. The papers would mention companies' big events, but it was nothing like today's 24-hour news cycle. Would a company like Select Comfort (NYS: SCSS) have fallen more than 20% in one day based on weak guidance from another company? Unlikely. This is beautiful, guys!

Let's look at this for a second. Tempur-Pedic (NYS: TPX) slashed the bejesus out of its guidance because management didn't realize other companies decided to get into their line of business. After Wednesday's trading period, the stock was down nearly 50%! For one thing, get off of your super-comfy beds, Tempur-Pedic management team. You have a business to run. But more importantly, does this mean that no one will ever sell foam mattresses again? No! It means the baby-boomers have watched too much Sanjay Gupta and now everyone wants a "healthy" sleep.

I don't care about the European debt crisis, or really any crisis. At some point in the near future, we will need more homes. And more homes mean more furnishings.

As Bill Ackman mentioned in his analysis of Fortune Brands Home and Security last Fall, housing starts are around a 40-year low. We have been operating below our sustainable housing demand levels for a few years. In the meantime, the U.S. population is on the rise.

With the increased competition in the specialty mattress space, prices will come down -- opening up the market to the lower-income, immigrant families who are driving population growth.

Select Comfort doubled its net income from 2010 to 2011. The next year or two may not be boom years for the economy, but we know it can perform in even a tepid market. Both Select Comfort and Tempur-Pedic are the premium brands in the space. You didn't see BMW disappear when Hyundai came around.

It's our time!
Did you ever see the brilliant film, The Goonies? While the world seems to be crumbling around them, a group of pre-pubescent mischief-makers decides to go on an adventure of a lifetime, escape danger, and in the end realize that no matter what happens, life seems to go on.

Winmark (NYS: WINA) has been a steady gainer for a long time. In the face of constant market insanity, this small but extremely profitable business is thriving. Greece, the birthplace of retirement, didn't keep this company from doing what it wanted.

Winmark owns a franchise of second-hand stores and provides financing services to small businesses. CEO John Morgan is a business leasing expert. Before running this company, Morgan had a virtually identical business that he sold for the prettiest of pennies. If you had kept an eye on the story, you would have seen Morgan buying shares on the open market like it was going out of style. You would have seen that Winmark's second-hand stores do extremely well in tough times, and only very well in mild times. If you had invested a year ago, you'd be up more than 35%.

So why do investors focus on the "cool kids" -- Wal-Mart, Apple, Facebook, or any other trendy company? Has the stock market become the Urban Outfitters of the business world?

The beat goes on
Don't let Rick Santelli scream at you from the Chicago Exchange trading floor. You didn't do anything to deserve that. Sure, it's good to know what's going on around the world, but don't let that dictate your investing. Let the stock market make its huge gains and huge drops and watch as Wall Street analysts continue to run around screaming with their hair on fire. Let the black box trading firms black box trade themselves into oblivion. None of this matters, guys.

Find your companies, do the work, and hunker down.

And thank heavens you have The Motley Fool. The idea of perusing the SEC's website may be about as fun as an all-day marathon of Roseanne. We've taken the initiative to provide you with not only the tools to invest better, but to point you in the right direction with some of our favorites. Check out the free report "The Motley Fool's Top Stock for 2012."

At the time this article was published Fool contributor Michael Lewis owns none of the stocks mentioned in the story above. You can follow him on Twitter @MikeyLewy. The Motley Fool owns shares of Tempur-Pedic International. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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