Burton Malkiel (whom I wrote about a few weeks ago) always laughs at those people who try to describe what the market is doing today. Articles describing "taking profits" or making assumptions such as "the Dow fell today on bad economic news" seem to be a way for we humans to make sense or even ascribe patterns to fairly random movements in stocks.
In his book, A Random Walk Down Wall Street, he talks about how gurus through the last few decades have made predictions and such descriptions of the stock market in order to reinforce whatever it is that they believe. One such guru "predicted" the stock market crash (actually tech bubble) of 2001. Why? Mostly because she had been predicting such things for the previous few years. But she was right and now people believe everything she says.
Do you believe gurus? Look at any article from Yahoo! Finance, the Motley Fool, CNBC, etc. and you have gurus up the whazoo telling you why the market is responding the way it is or what to make of such market changes. If you believe in the efficient market theory, then you know these gurus are just making stabs in the dark.
An article in the LA Times (and other places today) predicts doom and gloom because for the first time in a while, short-term and long-term bond yields have converged. This, according to the article, means that long-term bond investors are trying to "lock in interest rates for the long run" as a hedge against a bad economy. They think that the economy will tank, interest rates will drop, and they'll make money off of the long-term bonds.
They could be right. But then again, they could be wrong. This article seems to be an example of a "guru" writing about what is bound to happen because of a market indicator. The problem is that growth is good, interest rates are rising because of this, inflation is low, and businesses are expanding. All good news for the economy and bad news for long-term bond buyers locking in low interest rates.
Believe who you will but be skeptical of what you read and make sure if makes sense in the "grand scheme" of things.
2 comments:
I'm one of those who believes the market isn't totally efficient, creating opportunities for arbitrage, etc. I've found that learning about investing/markets/financial instruments is akin to most other large subjects: there is an infinite amount to know, someone will always know more than you, and someone will always disagree with someone else.
Therefore, I may listen to these gurus but I don't chase their ideas with my money. Their 2-minute day in the sun on CNBC goes into the pile with whatever else I'm hearing and reading, mixes with all the past accumulated knowledge I have, and is tempered by common sense before I bust out the Hamiltons.
In my opinion, most of these gurus are either holding on to the train after it's already speeding by, or are the bums at the train station who never get on any train but always want to know where you're going.
I'm fairly skeptical of gurus, as you can see from the post.
As far as the efficient market theory goes, I'm not totally on board, but people who claim to know the future should be avoided at all costs!
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