Stock market predictions are a dime a dozen, pumped out on a daily basis by marketing departments up and down Wall Street. These departments are staffed by hordes of financial types with advanced degrees and rooms full of the biggest computers known to mankind. These forecasts are readably available on the internet for free. Simply go to google and type in: “get rich quick.”
Most of these predictions are the result of esoteric calculations spit out by mathematical models which are far above what the investing public can comprehend. Why does Wall Street go to such lengths to make investing seem so complicated? Maybe it’s because they know that there has never been a witch doctor who achieved fame and fortune by simply advising “Take two aspirins and call me in the morning.”
According to the father of value investing, Benjamin Graham, all of this is a waste of time because “common stocks are subject to recurrent and wide fluctuations in their prices that have no foundation in the underly economic conditions.” In his book, The Intelligent Investor, Graham states that “there is no basis in logic or experience for assuming that it is possible for either an amateur or professional investor to successfully anticipate market movements.”
In his 1987 Letter to Berkshire Shareholders, Mr. Graham’s most famous student, Warren Buffett, takes these market observations one step further and gives the stock market a human persona he calls “Mr. Market.” Mr. Market is an emotional investor who constantly offers to buy and sell stocks to any interested party. Mr. Market is a tongue-in-cheek recognition of the fact that the markets pricing actions are based on the human emotions fear and greed rather than rational, calculated reasoning.
Mr. Market’s price quotations are usually arbitrary. At times, Mr. Market feels euphoric and can only see the favorable factors affecting the world of finance. When in that mood, he names a seemingly – emphasis on the seemingly – irrationally high price to sell his stock because he fears that you will snap up his offer and rob him of potential gains. At other times, he is depressed and can see nothing but trouble ahead for both the economy and the world. On these occasions, he will name a seeming irrationally low price to buy your stock, since he is terrified that you will unload your worthless stocks on him. One thing Mr. Market doesn’t mind being ignored - he’ll always be back tomorrow ready to quote you a new, still irrational price.
In today’s world of 24/7 financial news, most investors are ill-equipped to deal with the plethora of data that bombard them. As Warren Buffett and Ben Graham both advise, there are times when Mr. Market and his minions in the media need to be ignored, though this is easier said than done. The most common measurements of Mr. Market and his moods are the Dow Jones and S&P 500 indexes. Passive, index fund investing in the total market is a proven strategy for long-term success that outperforms trying to predict Mr. Market’s mood swings. In the word of the Oracle of Omaha, “If you can’t lick’ em, join ‘em.
There are 3 sections to my website. Each is designed to meet the needs of individual investors in various stages of their journey into the new era of internet/index fund investing.
The first section is called Wall Street for Dummies. It's mission is to introduce individual investors do the differences between the traditional Wall Street paradigm and the new era internet paradigm. It is a light hearted weekly commentary about the ongoing foibles of the financial services industry. It can be found in several places. First, on this website, under the Wall Street for Dummies tab. Second, it also appears in the internet version of “Grow Omaha”. It is also available by request via email address.
The second section is found under the tab, “Forget the Needle, Buy the Haystack.” This is five easy reading lessons on how to use internet brokers and index funds to create portfolios that are efficient and cost effective. Should you choose to pursue this method further, I have a more in-depth white paper that is available by request.
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