As I contemplate more than forty years in the blood-splattered arena that we call a stock market I realize that the game has never been more in my favor. Charlatans and buffoons have rigged a once sane market. It is a market where stupidity has been unchained. It is a most curious saga. I saw it all. I was there at the creation. The prevailing stupidities of today’s stock market are as follows:
1) any stock that falls 10% must be sold immediately because it is going to zero.
2) all stocks are generic clones of each other and therefore will go up and down together.
3) a dangerous over reliance on vague, generalized data about the market and the economy rather than hard,specific data on individual companies.
4) the growing belief that stocks are empty boxes with no intrinsic value and that therefore stock analysis is worthless.
5) a dangerous over reliance on averages and indexes that distort the truth.
When I broke into the stock market more than four decades ago it was a much different beast than it is today. In those days the stock market was dominated by long-term conviction investors. Investors understood that they were buying a business and not a lottery ticket. It would have never occurred to these investors that they were supposed to follow their stocks on a daily basis. The notion that a drop of 5% or 10% in a stock that they believed in was a cause for panic selling would have been regarded by them as a nonsense proposition. Indeed, it is quite possible that they would not even be aware that their stock had fallen by 10% or even 15%. I doubt if most of them even looked at the stock price more than about once every six months.
In those days, most newspapers did not even carry the stock tables and there certainly were not any financial channels on TV. Historically great emphasis was spent on analyzing and researching individual stocks because your success or failure depended on your ability to pick winning stocks.The prevailing notion then was that picking stocks with superior future prospects that were selling at bargain prices was the heart and soul of successful investing. Macro-economic factors such as guessing about the economy or guessing about whether the stock market was going up or down was regarded as a fool’s game.
During my decades long career as an investor I have owned about 750 stocks. Guessing about what the market was going to do or what the economy was going to do or what was supposed to be happening in China or Europe has never made me any money. What has made me money was being right about individual stocks that I had researched, understood and believed in. Consider CNBC, everyone’s default financial data source. For the most part, what you see is a bacchanalia of guessing. Guessing about the economy. Guessing about the stock market. Guessing about China and Europe. Over any sustained period, their guesses are no better than a coin toss. Except for the nifty-fifty, individual stocks are rarely mentioned and when they are mentioned, the only thing you hear is vague generalities. Rarely do you hear hard,factual data on individual stocks that a serious student of the game would regard as being important.
The implication is that all stocks are clones of each other imbedded in a mass of concrete and therefore must all rise and fall together. In 2010 the S&P 500, the benchmark for the stock market was up 12.8%. The top performing stock in the index in 2010 was Cummings which rose 105.8%. The worst performing stock in the index was Office Depot which fell 23.4%. Is there anything more stupid than the now common belief that if the stock market is up 12.8% then that’s what all investors earned? What is more important being right about the stock market or being right about individual stocks?
The whole art of stock investing used to concern itself with discovering what the intrinsic value of a stock was. This process was called ” price discovery” and was regarded as the primary function of the stock and commodity markets. By analyzing the stocks that investors as a group bought and sold the market “discovered” the intrinsic value of stocks. Until about twenty years ago nobody doubted that stocks had intrinsic value. The issue was discovering what that intrinsic value was. Today growing armies of alleged investors believe that stocks are empty boxes with no intrinsic value. If stocks have no intrinsic value then stock analysis is worthless. It therefore follows that what is of supreme importance is not analyzing stocks but in analyzing the actions of buyers and sellers who are now regarded as ” price dictators” and not “price discoverers.” In other words stampeding with the herd is the supreme virtue.
If today you gave a skid row bum who knows nothing about the stock market $50,000 and turned the TV on to CNBC and told him to start trading he would be operating on a level that is equal to that of most investors today. After all what does he have to know? The short answer is nothing. The only thing he has to do is become a trend chaser and stampede with the herd. Mindlessly buying whatever is going up and mindlessly selling whatever is going down and he will do this instinctively. There is no need for training. The astute reader has already figured out the consequences. An ever- greater deviation between intrinsic value and stock prices as fewer and fewer investors make any attempt at all to ascertain the intrinsic value of stocks.
At no time in the history of the stock market has their been such a dangerous over reliance on averages and indexes to guide investment decisions. Very few investors have a clue as to just how convoluted and dubious the formulation of these averages are. I have commented about the S&P 500 Index that was up 12.8% in 2010. A year in which the top stock in the index was up 105.8% and the bottom performer was down 23.4%.
Or take a gander at the famous NASDAQ 100. In 2010 this 100 stock capitalization weighted index ranked Apple number one with a weighting of 19.7%. Google at number two had a weighting of 4.7%. The top two stocks accounted for 24.4% of the index.The bottom fifty stocks accounted for virtually nothing. The only reason they were in the index is to deceive the ignorant.
Averages are liars. Once the investor realizes this, he has a powerful weapon in the unending battle for superior performance. In such a world the elite core of investors who still research and analyze individual stocks are living in a golden age. It is only necessary to hide in the weeds with our high-powered investor rifles and blow away the big game animals as they stampede past us in one of their mindless cattle stampedes.
by Fred Carach