"Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed."
"If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what`s going to happen to the stock market." Benjamin Graham (1894-1976)
Those words of wisdom certainly have not stopped people from trying to make predictions. Is it possible for logic to explain emotion? The powerful emotions of fear and greed have gripped the market and this week's volatility is no exception:
- Led by financials, stocks see biggest rally in more than four years on Monday...
- Thursday, stocks fall dramatically as financials get smacked.
- On Wednesday, Treasuries fell more than they have in a month...
- Then surged on Thursday.
- Money market funds hit record $2.6 trillion... Is safety getting sexy?
- The top five U.S. securities firms say tightening credit conditions will make for a "tough summer."
- It just may be that tighter credit standards are just what the market needs and now is a good time for a "squeeze."
Is all of this volatility from fears of "the credit bubble?" Perhaps we should ponder how the credit bubble came to be...
Have computers been able to predict these market trends? "Quant" hedge funds are paying the toll for failed computer models.
Can human interpretation of charts do any better?
Despite the sudden sell-off, a "hedge fund superstar" thinks stocks are on track for solid gains.
As I've stated before, stock prices are not volatile -- emotions are. How can any human being think they can predict something that is so affected by emotion? Certainly computers are no better at it. Logic and emotion are two entirely different entities that can not successfully grasp or contain the other.
I've also stated that the greatest investors are philosophers who also understand human behavior. Ben Graham's words should not be taken lightly. His success as an investor and his impact on the investment community is profound. After all, arguably the greatest investor who ever lived, Warren Buffet, followed in Mr. Graham's lead. Why wouldn't others do the same? Is that too logical?
I imagine Mr. Graham or any other financial philosopher would answer that humans will never stop trying to master things that can not be completely mastered (the stock market, the opposite sex, Golf). Otherwise our emotions would lead us to end the pursuit...
Enjoy your weekend and stay cool...
TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Adviser firm located in Mt. Pleasant, SC.
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