Yeah… that’s what they taught me first economics class in college.
I think the markets are more about momentum.
Like the invisible hand in allocating resources. Not that efficient right now, haha[/quote]
The way that Warren Buffet put it is;
In the short term, the market is a voting machine. (momentum)
In the long term, the market is a weighing machine. (efficient)
So that means it may be both. Not everybody in the market is logical. They see a stock, sounds good, sounds like a familiar name, and it is going up!.. so buy some. They don’t bother with looking at the financials. The PE ends up at 100, but revenue growth is at 5% and profit margin is unchanged. They stay in the stock. The increase in the price of the stock slows down – but they feel better times are ahead! Stock price tops out, starts to go down – but they feel it will resume going up and don’t double check valuation. Price is now in free fall and of course it will turn around. They have had the stock for 3 years and the true valuation is about 15% more than they paid for it. Now the stock price crashes through the +15% over cost valuation and head for their buy-in price. They panic and sell (capitulation) at about 2% below their buy in price. The stock continues down an additional 10%.. bottoms and moves in a flat line for a bit then starts going up. The emotional investor is to scared to buy because they don’t look at valuation and instead just looks at the movement of the stock price. Stock price continues to rise and goes past the +15% valuation (true valuation) of the company and the emotional investor starts worrying that they are getting left behind and that the ‘train has left the station’. They end up jumping on, buying the stock at 19% above true valuation… rinse and repeat (selling at 10% below true valuation again).
I have seen it so many times… I have had colleagues ask about how I have managed to save for retirement and I tell them. They ask for suggestions, I give them some basic mutual fund advice, but they don’t act on it until more than 5 years later at the top of the market (fearing they would be left behind), and they panic and buy in at the top… then as it drops, they panic and sell, sometimes below buy in. Of course they get angry at me and I ask when did they buy, and why didn’t they buy when I suggested? Why didn’t they tell me that they were going to buy the fund right before they actually bought it. I also don’t give them any more suggestions, even when asked. They don’t have to stomach for the volatility.
To succeed at stock investing, you generally need to be calm and have a ‘cast iron stomach’. You need to realize that the cattle herd moves to stock around violently sometimes and in fact, that might give you opportunities .. and a chance to pick up some ‘steak’…
flu – remember earlier this year when I said that this market downturn might have some ‘legs’ on it?..[/quote]
Well. Maybe.
But doesnt that assume that conditions for growth stay roughly similar? You seem to say theres an objective right price that the market eventually moves toward, and fools chase higher prices.
But what if instead of a 2 trillion stimulus we have a 200 trillion stimulus. Or there is some other shock to the system that recalibrated what earnings might be in number terms
