Thursday, May 8, 2008

My View of the Stock Market

The direction of the market on a daily basis is set by short term traders. They digest the news in the market that day and then trade based on it. This is not a conspiratorial view of things, it's not as if I believe that they all gather in a room somewhere and decide on where the market goes that day, but it reflects the old Warren Buffett cliche - in the short term the market is a voting machine, in the long run it is a weighing machine. Every day there is an informal vote by short term traders. Keep in mind that these traders can change their mind very quickly, as evinced by the volatility lately in the market.

So what has changed recently is that the voting has been for an up market, and we have seen a rally from 11,500 to 13,000 in the DJIA. The media has proclaimed this to mean that the "worst" of the crisis is over, but in reality nothing has changed except the optimism of the market. In March the market was overly pessimistic, imputing a worst case scenario and now it is doing the opposite, imputing a best case scenario.

We still face the same problems that we had before with Housing, the Economy, the credit crunch, the high price of commodities, etc. So what is the point of this diatribe? Stop listening to the market, because to paraphrase Mr. Bumble in Oliver Twist.

"The market is a ass."


Anonymous said...

Hey Eric, it should actually read

"This Market is an ass"

...and it doesn't even make sense Dude. Come on, you can do better than that, can't you? Much like the individual traders you feel obvious contempt for - they can do better, can't they?

Eric J. Fox said...

The quote from the link I put in the post is:

"If the law supposes that," said Mr. Bumble, squeezing his hat emphatically in both hands, "the law is a ass — a idiot."

I did think about the need to use "an" before a word beginning with a vowel, but since Oliver Twist was written in the 1830's, the rules were different.

Sorry, it didn't make sense. I'll make it a little clearer - the market is manic depressive, it swings from periods of euphoria to bouts of depression. A month ago, the market was signaling the end of Western Civilization, and now it is sending an all clear signal.

My advice is to ignore the short term fluctuations of the market and invest for the long term. If you truly are capable of finding stocks selling for less than what they are worth, you can't lose money because eventually the market will recognize that value even if it takes years.

Last, I do not have contempt for short term traders, they are some of the richest people on Wall Street. It is just not a strategy that I will use.