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Don’t Fight The Tape

How do you explain the behavior of the stock market today? In an environment where almost every piece of news is bad, how is it that the market was able to rally so convincingly? One possible answer can be found in the sage advice of Benjamin Graham – one of the few true gurus of investing. Graham once remarked that “in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine (i.e. its true value will in the long run be reflected in its stock price).”

What this means in the context of today’s market action is that investors have voted, and in the short term the bulls have won. The debt ceiling will be raised, the European banks will not disintegrate, and the current earnings season will not bring any nasty surprises.

But in the long term, the market will weigh the evidence and perhaps reach a different conclusion. The lesson to be learned from this is that betting against the momentum of this rally can be hazardous to your portfolio. Our model portfolios remain fully invested in stocks, and as uncomfortable as this may be, we remain steadfast in our commitment.