Friday, September 23, 2011

Schizophrenic Markets

It's hard to remember, but it was just last Friday that the S&P 500 closed up +5.3% for the week.

You remember last week, of course. The papers were full of worries over the euro zone, U.S. political gridlock and slowing economies.

The same worries that the market ignored last week and drove stock prices higher are now being blamed for stock prices moving lower. So which is it?

Leave it to a journalist - Ezra Klein of the Washington Post - to put all of this in perspective.

As he writes this morning:

Why are stocks diving today? Oh, no reason in particular. Or maybe every reason in particular. Which is pretty much the same thing.

Every major paper in the country is leading with the Dow’s fall. But not one has a good explanation for why the trap door opened today as opposed to, say, last Tuesday or next Wednesday....

{Reuters journalist Felix} Salmon’s headline is that “there’s no reason why stocks are down today,” and perhaps that’s right... there’s no really good reason that stocks are down today as opposed to some other day. The squiggly line squiggled down. That’s all there is to it.

Benjamin Graham - the Columbia business school professor who taught Warren Buffett investing - taught his students that the stock market was a voting machine in the short run, but a weighing machine in the long run.

Buffett likes to say that the market is manic depressive. One day it's wildly euphoric, the next day in utter despair. Buying when the world is consumed with worry, and selling when everyone is overly optimistic, has allowed Buffett and other Ben Graham disciples to become incredibly successful investors.

Value eventually wins out, but it doesn't go up every day.

It's easy to get gloomy in weeks like this, but it's worth remembering that the concerns of today are no different than those of last week, when stocks had a nice move higher.

It seems to me that all an investor can do is focus on fundamentals - which are knowable - and ignoring mass psychology - which is basically a crap shoot - is the best strategy for anyone who is looking to make money over the longer term.

Oh, and one final thought: if you sell stocks now, where are you going to place the proceeds?