The Stock Market Blues
When I was a teenager I asked my father, a successful businessman, what he thought of a downturn in the stock market, and he calmly answered: those who bemoan a market downturn never tell you about the market upturn. They forget to tell you that their losses came after great gains.
My father was a refugee from Nazi Germany who never fulfilled his academic dreams; he was what we call an autodidact, a self-taught man, who began as a leather apprentice, brick-layer, and a truck driver; he eventually employed more than 100 people.
His words come to mind when looking at the most recent market collapse (and speedy recovery). What should we make of this financial turmoil? Whose opinion should we follow? Who on the networks and Internet is trustworthy?
There are two schools of thought when it gets to the stock market. One claims that the stock market is a reflection of the financial reality of the marketplace, a mirror through which we can clearly see the reflection of the health (or sickness) of the economy.
This view is best articulated by the Efficient Market Theory, arguing that stock prices reflect or embody the best knowledge or information about a company and its financial prospects.
In short, stock prices are an accurate measure of all available information of any individual company or an entire industry. In this sense, no manipulation is possible because too many hawks watch carefully every move of every company—transparency is best found in stock prices!
The second view claims that the stock-market is a side show where gullible investors waste their hard-earned money while professionals use algorithms to clean them dry. Private deals are cut behind the scenes, such as when the “prophet (or sage) of Omaha” (Warren Buffett) buys and sells companies outside of public channels.
When he decided to “buy” some underpriced shares of Goldman Sachs after the last bubble burst that started the Great Recession in 2007/2008, he approached Goldman’s executives directly, named his conditions, and readily invested $5 billion. He “made” the market, rather than “followed” it or participated in its volatility.
Given that you may find one school of thought more appealing than the other, for whatever ideological reasons—there must be fairness! We are all equal investors, after all! My money is no different from a billionaire’s!—you still should be aware that it’s all about “framing.”
Framing is a favorite trope of behavioral economists who argue that judgments, choices, and decisions are made within specific frames of reference. Once the frame is changed, the decision will change as well. This is not “irrational,” but a reasonable reaction humans have to what appears relevant to their choice-making processes.
So, let’s frame the latest stock-market decline. On August 27, 2014 the DJIA stood at 17,122; a year later, on August 26, 2015 at 16,285; this is a 4.88% decline. Not something to cry over, is it? If someone told you that your house lost 5% of its value in one year, you might be upset a little, but not devastated.
If you look at a 5-year horizon, you find a different story. On August 27, 2010, the DJIA was 10,150, so that the same August 26, 2015 close of 16,285 represents now a 60% increase in value. Not bad for not doing much but letting your portfolio sit there, enjoying the economic recovery that was blessed by George W. Bush and implemented by Barack Obama.
For every Black Monday, August 24, 2015, with a so-called collapse of the market (588 point loss), there is Happy Wednesday, August 26, 2015, when the market rebounds (619 point gain). Do you live your life day-to-day or are you willing to look at a longer horizon? As I approach a milestone 60th birthday, I look at decades, not days.
Nutritionists and diet expert warn us not to check our weight hourly or daily, and remind us of normal body fluctuations. They do, however, look for trends of gaining or losing weight, when the cumulative difference is statistically significant. When my 94-year old mother began to lose weight rapidly, we knew she was dying; it was a unidirectional trend, not a daily fluctuation.
As under-educated as my father may have been, he had the common-sense of a refugee and a self-made businessman; he knew that when his business had a bad day, it didn’t mean he’d have a bad year, and vice versa.
The same is true of the restaurant business. It’s hard to remain optimistic when you have a bad day with few customers. But don’t forget the great night you also enjoyed. What makes the day-to-day ups and downs bearable is the optimism of a long-term horizon!
Raphael Sassower is professor and chair of philosophy at UCCS. He can be reached at email@example.com See previous articles at sassower.blogspot.com