Motley Fool Money: 03.08.2013

The stock market is reaching new highs, with the Dow hitting an all-time high, but this may not necessarily be a cause for excitement or concern for long-term investors. The recovery of corporate profits since the Great Recession has led to the stock market following suit, but the lack of hiring by companies and the Fed's quantitative easing programs have artificially inflated the demand for stocks. For Foolish investors, the answer is to stay invested in good companies for the long term, regardless of market conditions or the actions of the Fed. Additionally, the Think Fast, Talk Smart podcast, which focuses on communication skills, can be a valuable resource for improving both personal and professional interactions.

While the US economy has shown some signs of recovery, with household net worth reaching new heights and unemployment rates decreasing, there are still reasons for investors to approach recent market highs with caution. CEOs' insights into the health of their businesses, particularly for bellwether companies like Walmart, can provide valuable information for investors. The value investor Ron sees the Dow's current PE ratio of 18 as reasonable for long-term investors, but for those seeking growth, smaller, less well-known companies may offer better opportunities. Google, despite its high stock price, is considered innovative and likely to continue excelling at trying new things, while Apple, once the epitome of innovation, may be facing increased competition and a perceived loss of cool factor. Ultimately, the market's psychology plays a role in how companies are perceived, and even seemingly cool products can face challenges as competitors emerge.

Apple continues to be an innovative company despite some uncertainty about its future product offerings and the leadership of Tim Cook compared to Steve Jobs. The company's massive cash reserves make its stock an attractive investment opportunity, despite its relatively low valuation compared to its earnings growth. Meanwhile, companies like Google are taking calculated risks with new services like same-day delivery, while JCPenney struggles to find its identity and faces calls for change from activist investors. Ron Johnson, a former Apple executive, was brought in to turn around JCPenney but has faced challenges in doing so, leading some to call for his removal as CEO.

There's a lot of uncertainty surrounding the future of both JCPenney and Dell, with activist investors pushing for change and restructuring at both companies. Alan Questrom's criticism of Ron Johnson at JCPenney adds to the calls for action, and the debate over Dell's value as a public or private company continues. Warren Buffett's annual letter to shareholders provided some insights into the challenges faced by insurance companies as their legacy bonds roll off and need to be reinvested at lower rates. Buffett emphasized the importance of talented investing squads to navigate these challenges. Meanwhile, Michael Dell's efforts to take Dell private continue, with the outcome uncertain as other offers may emerge during the "go shop" period. Overall, these companies' futures hinge on their ability to adapt and thrive in changing business environments.

Buffett's trust in his lieutenants, Todd Combs and Ted Wechsler, should reassure Berkshire Hathaway shareholders about the company's future. Buffett praised their strong portfolio performance and plans to increase their management capital to $5 billion each. Meanwhile, the launch of Fox Sports 1 poses a serious challenge to ESPN, despite its current dominance. The new network has valuable sports rights and advertisers are still willing to pay for live sports programming. Fox's affiliate fees are projected to rise, potentially leading to significant profit growth. Lastly, an employee's quick thinking and a pot of hot coffee thwarted a robbery attempt at a Dunkin' Donuts, showcasing the dedication of Dunkin' Brands' employees.

Successful investing often involves backing visionary leaders and companies that challenge industry norms, or "rule breakers." These companies, which are typically funded by Silicon Valley and led by innovative CEOs, have the potential to be game changers and shape the future. However, separating the true rule breakers from pretenders can be challenging. Warren Buffett's "3 Is" of every cycle - the innovator, imitator, and idiot - can help guide investors. The innovator comes first and sets the trend, while the imitator follows and the idiot fails. By focusing on the innovators and backing their vision, investors can avoid mistakes and potentially discover the great businesses of the future.

Investing in the stock market is not just about buying and selling pieces of paper, but rather becoming a part owner of a business. According to Chris, understanding the business and its workplace culture can lead to better investment performance than relying on mutual funds or popular financial experts. He recommends reading business books, such as "Conscious Capitalism" by John Mackey, which promotes conscious business practices, and "Mavericks at Work" by Bill Taylor and Polly LaBarre, which explores innovative workplace cultures. Chris also emphasizes the importance of looking beyond traditional metrics like price to earnings ratio and considering new ways of evaluating businesses, as demonstrated in the book "Moneyball" by Michael Lewis.

While PE ratios can be useful in identifying relatively inexpensive stocks, they don't tell the whole story. The value of a company extends beyond its current earnings or cash flow. Factors like leadership and innovation can significantly impact a company's success, and these intangibles aren't reflected in a PE ratio. For example, having a strong CEO like Jeff Bezos can add value to a company, while a poor manager can detract from it. Additionally, technology continues to be a major driver of innovation and value creation, with the internet and emerging technologies like 3D printing leading the way. It's important for investors to consider the bigger picture and look beyond simple numerical metrics.

In today's complex world, it's essential to maintain an optimistic perspective and consider the bigger picture beyond the latest negative headlines. For instance, the decline in violence and improvement of companies like AIG, which have turned their business models around, are often overlooked. AIG, currently trading at a low price-to-earnings multiple, has been making significant strides in improving its balance sheet and moving away from risky financial insurance. However, it's important to note that the insurance industry is facing challenges, and AIG's loss on the insurance side may be temporary. Meanwhile, Krispy Kreme Donuts, a turnaround story, has plenty of room for growth in the US and internationally, with only a small market share compared to Starbucks and Dunkin' Donuts. Both AIG and Krispy Kreme demonstrate the importance of looking beyond current challenges and recognizing the potential for growth and improvement.

While Krispy Kreme has a heavily franchised business model, the company is making strides to improve marketing efforts and maintain control through cost cutting measures. Meanwhile, Coolik and Sofa Industries, a producer of semiconductor equipment, offers attractive valuations and a strong financial position, making it an intriguing investment opportunity. The CEO and CFO of Coolik and Sofa have a long-term track record of success and a focus on cost cutting, making them effective stewards of shareholder capital. Overall, both companies present compelling cases for investors in their respective industries.