Worried about the markets? Are things a little too crazy or volatile right now? Guess what: You probably hold too many investments or you hold investments for the wrong reasons. If you can’t get excited when the markets drop suddenly, you should check your portfolio and strategy to find (and fix) the holes.
Why Markets and Stock Prices Drop
The only two factors that affect the price of a stock are:
- there is a limited number of shares available for trading; and,
- more people are trying to buy than sell, or vice versa.
Earnings changes, analysts estimates, P/E ratios, subprime lending-none of those, in and of themselves, cause stock prices to change. However, the perception of what those things mean to the stock (or business) causes investors, as a group, to want to buy or sell stocks, pushing the price up or down in the process.
Most Investors Are Lemmings
A lemming-that is, they follow the pack blindly, not know where it will lead them. Warren Buffett:
As a group, lemmings have a rotten image, but no individual lemming has ever received bad press.
When investors being to sell, it causes other investors to want to sell, which then tells other investors to sell. The same is true when people begin buying again. Think about it: How many times have you thought or heard, “Boy, the market’s really going crazy. I should get in,” or “The markets are getting killed. I’m not putting any money in now.”
…or some other form of lemming-like thought.
I Predict The Markets Will…
Are we in a bull market? A bear market? Is the Dow headed for 15,000? 10,000? Who knows? Better yet, who cares?
No matter what the “markets” as a whole do, or even stock prices in general, great companies will continue to grow and be great-and their stock prices will follow them. It is not uncommon for a single stock price to hold steady or to creep up while the markets, in general, are dropping day after day.
And So, I Say: Let The Markets Crash
Horde cash. Then, get excited when the markets crash. Should you worry that all the “professionals” and really smart people on Wall Street are selling-running for the hills? Do they know something you don’t?
Probably not. More times than not, they are lemmings-which is precisely why our markets tend to move in cycles, up and down every few years while the “gurus” try to beat each other in the game of gambling.
Let the markets crash-shake out some of the bad blood and silly optimism. That way, you and I can go hunting for great businesses that are on sale.
What If I’m About To Retire
About to retire? You still have thirty or so years left to invest-years during which the markets will swing up and down. You’ll need your portfolio to grow, and the best way to do that is to buy wonderful companies when they are on sale. Like everyone else, you’ll need the markets to crash from time to time so you can put your money where you’ll get the most value.
As Buffett says:
Be fearful when others are greedy and greedy only when others are fearful.
Filed under: How to Think About Stock Prices
Amen to that. Something needs to be done about 401k plans. A study by DALBAR showed that, from 1984-2004, the average 401k investor earned an average annual return of just 3.5% while the S&P 500 averaged nearly 13% during the same time. I assume the rest of peoples’ “growth” was actually contributions and employer matches.
TW – Thanks for tomorrow’s topic!
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I have been reading your blog faithfully. I learn a lot from your blog, thanks. Yes, let them crash, so that we can get in to pick up something on sales. But the market is rebounding now, I think I have missed the boat. Probably there are still some gems left over.
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Don’t ever worry about missing the boat – another one is right around the corner. Besides, no matter what the markets do, a single stock can trade widly above or below its intrinsic value. There will always be opportunities.
In the end, you are better off sitting in cash at 5% for two years and then investing at 15% or more than throwing money in to “get it working” and end up with an 8% return.
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Well said. As you said “Most Investors Are Lemmings” – I would add “Most Mutual Fund Managers are Lemmings”, with majority of US 401K are invested in MF, with all the SEC rules was set on what MF can own, how much they can own, how ‘diversify’ they should be. It’s like what Mr. Munger said – “one legged man in a ass kicking contest.”. The scary part is a lot of hard working people have only 401K for their retirement.
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