Analysts often use colorful images to explain how the markets work \u2026 or why
\na particular index or asset class is “behaving” in a certain way.<\/p>\n
We’ll hear references to the “Goldilocks” economy, a Santa Claus
\nrally, tigers and tea leaves, bubbles and roller-coasters. A single adjective
\nin a Fed speech may dominate headlines and drive speculation for two days
\nrunning.<\/p>\n
This sells newspapers and gets ratings. But the danger is that in
\nover-simplifying an analysis, it becomes simplistic \u2013 almost without
\ndecision-making value.<\/p>\n
Today’s round-the-clock news cycle demands a talking-head rationale for
\nevery minor indigestive day in the market. It seems even the slightest 20-point
\nmovement must be attributed to something: obscure remarks by a finance minister
\nor an after-hours rumor about labor negotiations in Detroit.<\/p>\n
In this media environment the Dow, the S & P 500 and other indexes
\nacquire quasi-human characteristics, as if they were capricious Greek gods. As you watch television and read the papers, notice how often these
\nstatistical indices are subtly endowed with feelings or moods: the market
\n“has an appetite” for energy stocks on Monday, the market is
\n“panicked” by a Labor Department report on Tuesday, the market
\n“doesn’t like what it heard” in a speech on Capital Hill.<\/p>\n
Some of this is journalistic license, of course. But it contributes to and
\nreflects a “what-is-the-Dow-doing- today” obsession among investors
\nwith actively-managed portfolios, a chronic anxiety level that has sabotaged
\nmany a program.<\/p>\n
Often you’ll hear the anthropomorphic mantra “the market is always right.”
\nThis attributes some innate “wisdom” to an index. Even the godfather
\nof all analysts, Adam Smith, famously coined a metaphorical reference to an
\n“invisible hand” \u2013 an often-misunderstood allusion to macro-economic
\nforces, not to stocks.<\/p>\n
Fact: the stock market is not a person (nor is it a god!).<\/p>\n
Personification of the market \u2013 resulting so often in the downfall of
\ninvestors who try to predict or time its behavior \u2013 was superbly satirized by a
\nman whom many call the father of value investing, the Columbia University
\neconomist Benjamin Graham. He was such a pioneering influence that two of his
\nmost famous disciples, Warren Buffet and Irving Kahn, named sons after him.<\/p>\n
It was Graham who invented the bi-polar, emotionally disturbed character he
\ncalled “Mr. Market.”<\/p>\n
In his allegorical lessons, Graham had the ingratiating Mr. Market arriving
\nat your door every other day with something new to sell \u2026 suddenly becoming
\ndepressed over, say, a slump in the bond market \u2026 constantly jumping from
\nsector to sector \u2026 dumping everything one day, buying everything the next \u2026
\nworrying himself into paralysis over quarterly earnings.<\/p>\n
Trying to keep up with the schizophrenic Mr. Market was a recipe for ruin,
\nsaid Graham. Focus on the fundamentals. Build your asset allocation on
\nscientific data. Keep your emotions firmly in check. Diversify. And stay the course.
\nThat was Graham’s advice to all managers (and by extension, all investors).<\/p>\n
Set your allocation, said Graham, and establish your rebalancing
\nmethodology. Then, if you really can’t resist the distractive ups-and-downs of
\nMr. Market, go and “live in a cave for a few years,” to paraphrase
\nthe Columbia
\nprofessor. Just stay away from that addictive stock ticker \u2026<\/p>\n
Graham compared the short-term performance of all markets to “voting
\nmachines” in which temporary winners and losers are chosen by popular and often
\nill-informed sentiment; whereas long-term returns are sorted out by the
\nunerring scale of time, which always balances true.<\/p>\n
In other words, Graham said, put history on your side.<\/p>\n
Think of the markets as a measure, a data base, a colossally efficient repository
\nof collective daily investment decisions. As the Nobel laureate Friedrich Hayek
\npointed out: the market is a mechanism “more immediate and precise than
\nany system a human has ever devised.”<\/p>\n
So in your daily perusal of the business press, watch out for those fairy
\ntales and amusement-park metaphors \u2026 and that unpredictable Mr. Market.<\/p>\n","protected":false},"excerpt":{"rendered":"
Analysts often use colorful images to explain how the markets work \u2026 or why a particular index or asset class is “behaving” in a certain way. We’ll hear references to … Read more