What the Last Two Months of Market Moves Taught Us

The man was such an intellectual he was almost no use.

I’ve said it before.

Georg Lichtenberg hints at it above.

You don’t need to be a genius in this game.

You just need to keep things simple and understand what you’re doing.

There are all kinds of smart in this world. And a lot of it is unnecessary for investing.

You don’t need an IQ of 160 to make money in stocks.

You don’t have to attend the prestigious schools, get straight As or be great at chess.

Although it does help if you want to be an investment banker. A perfect resume and genius façade makes it easier to sell crap to people.

You don’t need ‘smarts’ in this game. What you need is temperament.

Free report: Aussie stock picker, Sam Volkering (with gains as high as 1,431% in the last 18 months) reveals what he believes are his next four big potential winners.

Stocks go up and stocks go down

Answer me this…

Why did the S&P 500 (largest 500 US stocks) suffer its worst final weeks since 1931 last year?

And why, just two months later, did the index climb double digits?

Was the value of the largest 500 stocks really worth 20% less in December than in October last year?

No? So why did these blue chips, thought to be stable and safe, fall so much so quickly?

Even the ‘experts’ running hedge funds didn’t have good answers.

We know this because a lot of them lost a whole lot of money by being ‘active’ during that time.

I think it’s pretty clear, even on a subjective basis, markets are not always efficient.

Sorry Adam.

The invisible hand that Adam Smith proposed, which guides the market to equilibrium, is aptly named.

It’s invisible because it’s often not there!

I like the way Charlie Munger put it…

The market is mostly efficient, but not entirely.

So, while markets do achieve ‘good’ outcomes (far better than anything the government could do), these outcomes are not perfect.

If they were perfect, there’d be no need for investment management entirely. We wouldn’t bother talking about investment ideas here at Money Morning either.

If markets were entirely efficient, we’d all just buy index funds and be done with it.

But this isn’t the case. So we keep on trying to find value.

Let’s look at another example. Let’s look at the Chinese stock market.

After dropping as much as 30% last year, the Shanghai Composite is already up 20% this year.

Is this a true reflection of business values?

Did the value of Chinese businesses drop 30% over 12 months and then rapidly rise 20% in two? Lift up the hood and you see even more drastic movements.

Here are some of the winners and losers from February…

Money Morning

Source: South China Morning Post
[Click to open new window]

I won’t discount that this can’t happen. All of a sudden, one announcement or event doubles a business’s value, and thus the stock follows.

But is this really what’s happening all the time to a majority of stocks?

I think it’s already pretty clear investors are not always rational (especially the smart ones). We don’t all operate with perfect information (even in our internet age). And we don’t all have the same opinions on business, politics or the economy.

But there are groups of investors not even reading from the same playbook!

Here’s Louis Tse Ming-Kwong of VC asset management talking about the Chinese rally:

From 2,500-something to almost 3,000 points, it was quite a gain (for the Shanghai Composite Index) and made everybody happy.’ But ‘February is a bit overdone’ and the rally was sentiment-driven, Tse said.

Yes, you heard it.

Tse isn’t saying investors focus on business operations. He thinks people have jumped into stocks on the belief that sentiment will lift them higher.

These are the ‘smart’ investors that see stocks as pieces of paper with gyrating prices attached. And because they’re so smart they can predict where these prices will go next…

Take the road less travelled

Momentum, trend-following, whatever you want to call it, has become an increasingly popular strategy among investors.


Because it promises short, fast gains. You don’t have to hold onto losses for very long. Plus you look ridiculously smart if you jump in and out at the right time.

Why do you think people still buy Amazon and Netflix as they trade at ridiculous multiples?

Do you think these buyers are expecting massive earnings growth over the next decade?

Or do you think they’ve jumped in because they believe momentum will continue carrying the stock upwards?

Maybe I’m being too harsh. Momentum investing has been shown to work over 12-month periods, but not over the long haul, though.

The point I’m trying to make is that you don’t have to stress yourself with any of this.

You don’t have to know everything that’s going on in the world economy. You don’t have to have a perfect picture of what central bankers will do next or how this trade war plays out.

All you’ve got to do is find a few good businesses you can understand and try not to lose money (that process begins before you enter the stock).

Bull or bear market this year, it doesn’t matter.

Find businesses you understand, for prices that are sensible and hold onto your best ideas.

This is the investing road less travelled and it’s created more millionaires than you think.

I can’t wait to get on the road again,

Harje Ronngard,
Editor, Money Morning

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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