Analysts often use colorful images to explain how the markets work … or why
a particular index or asset class is “behaving” in a certain way.
We’ll hear references to the “Goldilocks” economy, a Santa Claus
rally, tigers and tea leaves, bubbles and roller-coasters. A single adjective
in a Fed speech may dominate headlines and drive speculation for two days
This sells newspapers and gets ratings. But the danger is that in
over-simplifying an analysis, it becomes simplistic – almost without
Today’s round-the-clock news cycle demands a talking-head rationale for
every minor indigestive day in the market. It seems even the slightest 20-point
movement must be attributed to something: obscure remarks by a finance minister
or an after-hours rumor about labor negotiations in Detroit.
In this media environment the Dow, the S & P 500 and other indexes
acquire quasi-human characteristics, as if they were capricious Greek gods. As you watch television and read the papers, notice how often these
statistical indices are subtly endowed with feelings or moods: the market
“has an appetite” for energy stocks on Monday, the market is
“panicked” by a Labor Department report on Tuesday, the market
“doesn’t like what it heard” in a speech on Capital Hill.
Some of this is journalistic license, of course. But it contributes to and
reflects a “what-is-the-Dow-doing- today” obsession among investors
with actively-managed portfolios, a chronic anxiety level that has sabotaged
many a program.
Often you’ll hear the anthropomorphic mantra “the market is always right.”
This attributes some innate “wisdom” to an index. Even the godfather
of all analysts, Adam Smith, famously coined a metaphorical reference to an
“invisible hand” – an often-misunderstood allusion to macro-economic
forces, not to stocks.
Fact: the stock market is not a person (nor is it a god!).
Personification of the market – resulting so often in the downfall of
investors who try to predict or time its behavior – was superbly satirized by a
man whom many call the father of value investing, the Columbia University
economist Benjamin Graham. He was such a pioneering influence that two of his
most famous disciples, Warren Buffet and Irving Kahn, named sons after him.
It was Graham who invented the bi-polar, emotionally disturbed character he
called “Mr. Market.”
In his allegorical lessons, Graham had the ingratiating Mr. Market arriving
at your door every other day with something new to sell … suddenly becoming
depressed over, say, a slump in the bond market … constantly jumping from
sector to sector … dumping everything one day, buying everything the next …
worrying himself into paralysis over quarterly earnings.
Trying to keep up with the schizophrenic Mr. Market was a recipe for ruin,
said Graham. Focus on the fundamentals. Build your asset allocation on
scientific data. Keep your emotions firmly in check. Diversify. And stay the course.
That was Graham’s advice to all managers (and by extension, all investors).
Set your allocation, said Graham, and establish your rebalancing
methodology. Then, if you really can’t resist the distractive ups-and-downs of
Mr. Market, go and “live in a cave for a few years,” to paraphrase
professor. Just stay away from that addictive stock ticker …
Graham compared the short-term performance of all markets to “voting
machines” in which temporary winners and losers are chosen by popular and often
ill-informed sentiment; whereas long-term returns are sorted out by the
unerring scale of time, which always balances true.
In other words, Graham said, put history on your side.
Think of the markets as a measure, a data base, a colossally efficient repository
of collective daily investment decisions. As the Nobel laureate Friedrich Hayek
pointed out: the market is a mechanism “more immediate and precise than
any system a human has ever devised.”
So in your daily perusal of the business press, watch out for those fairy
tales and amusement-park metaphors … and that unpredictable Mr. Market.