All of us have an inborn drive to make sense of the world. We knit together theories of why things happen to provide anchors in uncertain times. This week we review some anchors to help understand stock market volatility and how markets work.
It’s Not Easy. Everyone wants to make money, and especially to find the sure thing or “silver bullet” that will allow them to do it without commensurate risk. Thus, they work hard, searching for bargain securities and approaches that will give them an edge, driving out opportunities for easy money. Securities become more fairly priced, and free lunches become harder to find. Anyone who thinks it’s easy to achieve unusual profits is overlooking the way markets operate. This memo, from Howard Marks of Oaktree Capital Management, is largely about the challenges markets present.
Should Investors Sell After A Correction? U.S. stocks have typically delivered above-average returns for up to five years following 10% or more declines. Looking beyond the U.S., other markets display similar results. Volatility is a sign markets are working properly. The role of securities markets is to reflect new developments— both positive and negative—in security prices as quickly as possible. Investors who accept dramatic price fluctuations as a characteristic of liquid markets may have a distinct advantage over those who are easily frightened or confused by day-to-day events and are more likely to achieve long run investing success.
The Mirage of Financial Singularity. Financial singularity implies that all investment decisions would be better left to a computer program. Real world markets are nowhere close to precise valuation techniques. Markets seem to be driven by stories. There are stories of great new eras and of looming depressions, about technology and declining resources, about politics and bizarre conspiracies. No one knows if these stories are true, but they take on a life of their own. Sometimes they go viral. Even among rational people, some of them have crazy theories and also influence markets. Consequently, all other investors must reckon with them, and their craziness is not going away anytime soon. Human judgment, good and bad, will drive investment decisions and financial market outcomes for the rest of our lives and beyond
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J. Mark Nickell & Co.
Disclosure – The articles mentioned in This Week with J. Mark Nickell & Co. are for information and educational purposes only. They represent a sample of the numerous articles that the firm reads each week to stay current on financial and economic topics. The articles are linked to websites separate from the J. Mark Nickell & Co. website. The opinions expressed in these articles are the opinions of the author and not J. Mark Nickell & Co. This is not an offer to buy or sell any security. J. Mark Nickell & Co. is under no obligation to update any of the information in these articles. We cannot attest to the accuracy of the data in the articles.