Thursday, April 3, 2014

The market as a social institution

A stock or the broader market on the margin are like people.

Say you are having a bad day because you are sick. Then your computer crashes. Then your dog craps on the floor. The day gets worse and worse. It doesn't matter if you are a billionaire or a poor man. The progression of that day is "bearish."

The same thing for stocks: bad earnings hit, then a downgrade, then another company in the sector cuts guidance. It doesn't matter if it's a $200 billion company or $100 million.

But then imagine you have been sick for a long time, and instead of needing to have your entire hand amputated, you only lose a finger. Imagine that the $100,000 home repair will only be $20,000. Imagine that the dog only crapped on the tile floor and didn't urinate into the couch? Now the day is bullish.

Likewise with stocks. Imagine that the expected bankruptcy doesn't happen. Imagine that conditions aren't as bad as expected, etc. Now a $2 stock can double.

Yes, in the bigger picture over the longer run, things like valuation matter. For instance, the life of a billionaire in general will likely be better than that of a security guard making no more than $40,000 a year. But for each individual day or week or month, there will be movements. There are good time and bad times for everyone, and for every stock. The question is identifying what's happening now and trading around it.