Monday, February 17, 2014

Let's Talk about the Stock Market

What do you know about the stock market?

The stock market is given to be, by many well-coiffed market reporters, a lean well-oiled machine that takes as input all of the information in the world and spits out a value (or series of values) that accurately judges the state of the collection of people and business that make up the economy which balances perilously between prosperity and doom.  

A scribble of a  squiggly road, labelled 'the economy'.  On the top side is a happy looking place labelled 'prosperity'; on the bottom side is a sad, fiery place labelled 'doom'.
Or is already doomed, depending on where you source your news.

You might imagine the market like a race-car, driving along economy road reacting instantly to hairpin turns with tight handling.  

A scribble of a car, rounding a corner on the road, zoomed in from the earlier picture.
Vroom vroom (TM)

Pages and pages of theory has been written on how clever the market is at reflecting the current global financial condition.

A scribbled red race car labelled 'market' skidding around a corner on the upswing.  In the corner is a cut and paste of web article with the headline "US Stocks Rise as Jobs Data Fuels Optimism of Stimulus".
Hiring is down... yay?

The same scribbled red race car labelled 'market' skidding around a corner on the downswing.  In the corner is a cut and paste of web article with the headline "Stocks fall after US reports hiring slowdown".
Same day, same news, different result.

The scribbled race car driver, zoomed in to his face.  In the corner is a cut and pasted online news article with the headline "Market forces Central Bank to raise interests."
"The market made me do it!"

They're wrong.

So let's say that the "market" is a vehicle.  

Scribble of a giant, awkward vehicle with many protrusions driving off a road lined with rocks.  The vehicle is labelled 'market'.
Don't ask about the mileage.

It's big and cumbersome and can pretty much go where it wants.  Who's at the wheel?  These guys. 

Six people visible inside a space, three appear to be using controls.  One is sleeping, one is staring vacantly into space and one is looking out the window.
Even that guy who's sleeping.
And who gets the biggest input where the vehicle goes?  THIS guy.

Zoomed in view on one of the people piloting.  This one uses joysticks and has red eyes and a twitchy smile.

Yeah, the one with the twitchy hands and the wild eyes.

An even closer view of the guy with red eyes and a twitchy smile.
This guy.
The drivers can't really see where the road is; the market's not set up very well for visibility.  They just aim where they think they should go, and don't let reality get in the way.
An overhead view of a road cutting diagonally across the picture.  On the top, the ground is green.  On the bottom, the ground is red.  The vehicle's tracks indicate that it's off course, currently in the green.
Same picture.  Now the vehicle has progressed farther, still mostly randomly, still off track.
Inevitably someone realizes that they're off track.

Back to the view of the inside of the imaginary vehicle.  The guy staring out the window says: "Guys?  I think we might be a bit off track."

The same guy adds: "Yup, the track is definitely over that way a bit."  Now everyone looks nervous.

So the drivers keep a steady hand on the wheel and re-adjust their course to intersect with the road.

Now the same guy panics and yells: "We're all going to DIE!".  Everyone is awake and alarmed.

Back to the overhead view.  "Skwee!" go the tires and the vehicle plummets into the red zone.

Just kidding.  They panic.

Image of all the people inside the vehicle panicking:  "EEEE!" "AAAA" "This can't be happening!" "AAAGH!" "Push some buttons!  Pull some levers!" "There's no use!  We're doomed!"

Back to the overview, now the vehicle is deep into the red, and yelling "AAAAA!"

THAT's the stock market.


"So where should I invest my money?" you might reasonably ask.

"The stock market."  I would say.

"But that doesn't make sense!" you might reasonably respond.

"I'll tell you about dividends."  I'd say.  "But that's a whole other story."


You must realize that "Let's Talk Investing" is not authored by a financial planner, advisor, or a professional investor in any capacity. As such, this is not expert advice in legal, taxation, financial, or any type of information that may be provided. The reader must realize this when reading these articles and must not rely on them as the ultimate source of information but must seek proper verification from the appropriate professionals before acting on any of this 

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