The Stock Market boggles my mind

June 4, 2006 2 Comments

I don’t get the Stock Market. I mean, I know the basics of how it works. I know that it’s bad when the red arrow points down on the evening news and good when the green arrow points up. (okay, I’m over simplifying it, but you see what I mean)

I took Business Economics in high school and passed with a B, so I know all the general info on the concept, and all that jazz.

But the reason the Market boggles my mind, is because it seems that anytime a rumor hits the papers about a company’s bad earnings, investors put on the brakes, causing the market to fall. Then everyone runs around screaming, flailing their arms in the air, until another rumor spreads of a sector’s companies having a boost in profits. Then everyone invests again.

It reminds me of primitive man when the sun would set, and chaos would ensue thinking the gods were angered and it would never rise again. I wasn’t there, but that’s what I’m told happened.

It just seems like if people stopped listening to the rumors, found their cajones and invested as they normally would, the market would do just fine. When it tanks, it’s because people pull out of the Market.

Stupid stock market…

It boggles my mind

'Kiss my eyes and lay me to sleep'

Lord of the Rings silliness

http://burrowowl.net Burrowowl

It’s simple: some company is currently valued at $100 per share. An earnings report comes out that is below expectations by 2% or so. This doesn’t meant that the company is about to go out of business, but rather that it isn’t doing as well as many people thought. The price suddenly drops to $98.00 or even $95.00. Another quarter passes, and the company announces a new product, which is well-received. The price shoots up to $105.00 or $110.00 dollars. Were the people who sold at $95.00 knee-jerk idiots?

Probably not. What this description leaves out is that five years ago this stock was at $80.00 per share and had split a year ago. The people that bailed at $95.00 per share may well have made out like bandits. Dips like this are times that investors remember why they bought a given stock in the first place, and reassess their judgment. It’s why you’ll sometimes refer to such events as “profit-taking;” because that’s exactly what’s happening.

Apply reasoning like this to an oddball company like Apple, which has been on the verge of collapse for twenty years, and it makes a lot more sense.

Oh, and they’re a bunch of thieves trying to keep the working man down.
http://ianferrel.wordpress.com Ian

Another way to think about it (not to imply that the above is wrong. It’s right. But there are several ways to understand what’s going on) is this:

The value (not the price) of a stock is based on future earnings and dividends. When someone bought that stock at $100 per share, it was because his estimate, based on the best information he had at the time, of the long-term earnings potential of that stock was at least $100 in present-day money.

Now, all of a sudden, new information comes out (yes, even a rumor. Rumors are information, just risky information). With that new information in hand, the proper valuation for the stock changes. As soon as people realize that the value of a stock is different than the price, they buy or sell. After all, they’d be fools not to. If I’ve got something that’s worth $110, and I offer to sell it to you for $100, you’d take it in a heartbeat.

For more reading, I strongly recommend The Four Pillars of Investing, by William Bernstein.