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The Market Meltdown

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If you ever wonder whether there are lots of folks who have a better handle on the markets than you or I do, we need only look back to 2013, when the Nobel Prize in Economics was awarded to three folks.  One was Eugene Fama, most closely associated with the theory that markets are very efficient and quite unpredictable.  Another was Robert Shiller, who argued that markets aren’t very efficient and can be predicted.  No, seriously.

 

But here’s the thing:  in my opinion, they are both right!  [And if folks want to send this to the judges in Stockholm you have my permission.]

 

In the overwhelming majority of times, markets are mostly efficient.  While the business media often ascribe reasons for stocks rising or falling in any given day, here’s the reality:  they are giving us the excuse, not the reason.  Markets go up and down every day for hundreds of reasons and there is little value in trying to figure out “why” the market declined over a few hours or a day.  You often find correlation, but rarely find causation in short time frames.

 

But there are times that markets are exceptionally inefficient.  We witnessed that during the so-called “flash crash” in 2010 and to a slightly lesser extent on Monday (August 24), when the Dow Jones Industrials fell nearly 1,100 points at the open, only to close at 15,871, five hundred points above the lowest drop.  The market was rational, right up until the point when it wasn’t.  And when it wasn’t was your and my best chance to profit.

 

On Monday, GE was at $19.37 at 9:31AM.  Thirteen minutes later, it was at $24.04, a gain of 24%.  In 13 minutes.  Was there something that happened to General Electric or its balance sheet or its earnings or its product sales over those 13 minutes?  Not a thing.  It was sheer panic, causing boatloads of shares to be dumped on a market that had very few buyers.

 

We were net buyers in the first few minutes of that memorable morning.  And it stunk!  It was miserable; we placed an order and wanted to upchuck our breakfasts.  But when the mania of the moment clears we, as investors, were rewarded by traders who see the price of many things but the value of few.

 

You and I don’t get many chances like we did Monday morning.  And if we find “the bottom,” it means we’re both lucky and good.  At the core, it means we paid less for a company Monday—a lot less—than that identical company was trading just a few days earlier.  Doesn’t mean it guarantees success, just that it gives us a better chance at it.


I’ll take every chance at long term success I can find.  How about you?

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