The Stock Market Is Bipolar

“Everyone else is doing it” was never an argument that convinced my parents.  I have to wonder why polling is the way to decide on whether or not anthropocentric global warming is a real thing.

I have mentioned before that I do not think scientific truth is determined by a show of hands, but my opinion, obviously, does not carry the day.  Perhaps someone more able could do so.

George F. Will in the Washington Post recently brought up this point.

When a Nazi publishing company produced “100 Authors Against Einstein,” the target of this argument by-cumulation replied: “Were I wrong, one professor would have been quite enough.”

So possibly, “the deniers” have some scientific validity going.  Did they not, there would be no need for polling and rhetoric. A simple proof would suffice.  Time will tell.

Thinking in the same vein, possibly it is not so wise to follow the crowd with your investments.  Warren Buffet has recently published his annual letter to Berkshire-Hathaway shareholders, and in it he makes some important points:

“Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally,”

“Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits — and, worse yet, important to consider acting upon their comments.”

Buffett has frequently said that he does not participate in the market.  He buys businesses and his profit will come from their enduring market position and sound management.

The letter, released March 1, includes another example of an old Buffett theme.  The stock market is bipolar.  Sometimes manic and demanding enormously high valuations and sometimes depressed and offering ridiculously low valuations.  Trading can be lucrative.  People can get money by moving carefully in the market, but Buffett claims he is not smart enough to do so.

His view is that people should buy good assets and keep them.  That goes against the fashionable trading view (everyone is doing it) that has surrounded us for the past twenty years or so.  Nonetheless, I will bet and give odds that, when making investment decisions, Buffet does not rely much on Jim Cramer and his fellow commentators.

Perhaps it would be smarter for most of us to learn a little about what represents great long term value and look for more of it.  The textbook is here.  Berkshire Hathaway Letters to Shareholders, 2012.  It covers 1965 to 2012.  There are single letters after 1976 here.

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Contact: don@moneyfyi.com  |  Follow Twitter   @DonShaughnessy

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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