WHY THE PRICES OF STOCKS DROP WHEN THERE IS NO BAD NEWS ABOUT THEM
and
JUST HOW GOOD ARE ANALYSTS?
This is a subject that seems to totally befuddle market analysts. There is some fundamental suggested reading for them: "Wealth of Nations" by Adam Smith. You see, Mr. Smith came up with this now forgotten idea called "supply and demand." Imagine this pool of stocks. If there are more people wanting to buy them than are willing to sell them - at the prevailing price, the price must go up to give incentive to their holders to part with them. If however, there are more sellers than buyers, then the price goes down.
Not long ago, Princess Diana died and then there was her funeral broadcast worldwide. AND the stock market went down during that time. WHY? Princess Di had nothing to do with the world's financial condition. Very perplexing until you go back to Adam Smith's theorum of supply and demand. We chimps, for example, rolling in our wealth, decided that we wanted to watch the funeral rather than go out and spend our money to buy more stock. However, there were a number of humans who suddenly found themselves in financial straits - sudden hospitalizations, accidents, and such. Those people HAD to sell some of their stock to raise the funds to pay their bills. But what they found was that most of the buyers were gone from the market watching TV. Suddenly there were more sellers! So there is absolutely no mystery - the stock prices went down.
The same can be said for the opening of the "Gulf War." War usually means lots and lots of production, more income for companies, and stock prices go up. But for the first several days of the Gulf War, the prices went down. WHY? Again, the potential buyers had the luxury of being able to sit at the market sidelines and watch the TV. And needy sellers found slumping prices.
Of course, in both cases, as soon as the wealthy side-line sitters found their TV distraction ending, they went back to the market, found depressed prices and went on a feeding frenzy that rocketted the prices skyward. So the lesson is, that the next time you find yourself one of hundreds of millions glued to the TV, you are missing a buying opportunity!
HOW STOCK ANALYSTS INFLUENCE THE MARKETS
Recently every analyst touted on TV as being a "biggie" made the call that Yahoo! was going to come out with lousy earnings. YHOO plummeted as the mass population of the world took them at their "expert" word, and sold. The earnings were finally revealed, and they were stellar! YHOO immediately rose about 30% in a couple of days. How can these experts be so wrong? And time after time???
Let's look at the "batting averages" of the top twelve:
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These are numbers indicating both the percentage of times their predictions were qualitatively correct, and the quantitative accuracy of that prediction.
Let's pick on the worst of these predictors, who happens to be a chief analyst of a major investment group. First, we chimps consider the chance that the market will go up next year. Well, since it has tended to go up for the last century, it seems to us that it would likely go up in the year to come. If we are right, we have a batting average of greater than 0.500, indeed something more like 0.600 or so. Looks like Analysts #5 through 12 belong with us in the zoo - but, of course, in the next building with the monkeys.
And then if we chimps randomly select stocks (darts or picking from a hat), our chances then improve a little to something akin to that of the overall market averages, which tend to favor the larger and faster growing stocks. We thus find ourselves wafting around in the heavens with those greater than 0.700. So what is so wonderful about having an average of 0.733? Humans ought to be able to do better than that!
And then these analysts have the audacity to get up in front of international television and pontificate about the market. Their all too frequent misunderstandings cause panic in people who trust them. The panic causes there to be more sellers than buyers, prices plummet; institutional computers detect good buys the next day, and who gets rich? The institutions who have hired the analysts. Chummy situation - VERY suspicious.
Once again: if these analysts' findings are so good, why do they have to work for a living? They should be rolling in dough! (Psst: the human secretary of this document quit his job shortly after taking our advice!)
In summary, disregard what analysts say. You'd probably get better advice if you'd ask us in the zoo!