At Tru-Point Synergy we believe in keeping our partners abreast with discussions and publications that will have a positive impact on their business interests and the broader community. We stay engaged as market needs continue to shift. While Tru-Business, our quaterly publication, will continue to be an excellent source for insightful thoughts on business, our featured articles will provide a running commentary on topical issues. At the moment, stockmarket investors are nervous as to what direction the market is taking. Will the "Market" keep going up, or is it time for the widely expected correction? We would like to undertake the exciting journey of navigating the markets with you, hence we share some thoughtful insights with you.
Making Market Volatility Your Friend- how to do it
Dictionary.com defines the Market as a "meeting of people for selling and buying.” In reference to Wall Street, market behavior is reported in terms of the different market indices like the Dow Jones Industrial Average (DJIA), the S&P Index, NASDAQ, etc. These indices are tracked continuously with reports for afterhours trading even. Around 930 a.m. the markets open every week day except on certain holidays. The daily news does not end without mention of such phrases as “the Market is flat; the market is choppy; the markets are smiling; the markets crashed; there was a jump in the market; the markets are moody, there was a dampened mood on Wall Street; the markets cheered, etc.” With these commentaries, one would think the market was an emotionally labile being. Thanks to the running commentaries, the day starts and ends with Wall street on most people’s minds. The connected world therefore experiences the mood swings of the market through news updates. So why should anyone care about Market Behavior?
One could go on and on extoling the virtues and vices of market behavior. Books have been written on this topic. Some renowned commentators on Market Behavior include the market genius, Warren Buffett. I would like to dwell on why understanding market behavior matters. It matters to investors who now confidently trade on their own in brokerage accounts on platforms hosted by Scottrade, Sharebuilder, Ameritrade, fidelity, and many more. These investors make decisions on a daily basis using some rational criteria of their choice. As investors, they are part of the Market; hence their behavior too is reflected in the daily gyrations manifested in the Indices like the DJIA. Decisions made by individuals, independently, across the globe, manifest themselves in the Market Indices crashing or jumping as reported in the news. There is so much buying and selling, it is unimaginable. Because of this volume of trade, and the availability of information, many commentators and researchers consider the market to be perfect. What this conclusion suggests is that the market is a true reflection of company valuations. This may be true in the long run, but in the short run, the irrational behavior of the market distorts the picture.
Whenever there is a negative or positive report on a particular company or the economy, the market reacts by buying or selling. The expectation is that the reported event will have long term consequences on the company. When people start selling off a company stock after a reported scandal, they move in droves. It is like a stampede as no one wants to be left holding “worthless” shares. Few can stomach the agony of riding a market hiatus. As more people sell, the “worthlessness” of the shares becomes a self-fulfilling prophecy. Sometimes, these fears are well grounded, but a lot of the time, decisions are made on incomplete information. The incorrect logic is that if a share price is going down, it must keep going down. If it is going up, it must keep going up, hence buying when going up, and selling when going down. As mentioned earlier, there will be times when this behavior is appropriate, if it is based on sound analysis. Unfortunately, the behavior is often times a knee jerk reaction, which results in investors paying too much, that results in huge losses when there is a stock bubble, like the Tech bubble of the early 2000’s, or in investors missing out on good opportunities like after the stock market crash of 2009, when shares of companies with strong fundamentals could be bought for a song. Who would ever think that some of the big banks could be bought for less than $3/share. Contrarian behavior alone can result in more than average return. However, understanding that the human tendencies of fear and greed underlie how we behave on the market can help rationalize our investment decisions. These behaviors are not going away any time soon. That is why it is safe to say that one will be right to say a market crash will be always in the offing, it is just a question of when, particularly when the market becomes highly exuberant.
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