| When I broke into the stock market in 1961 the | | | | don't have a market you have a mob that is |
| stock market was a far more rational market than it | | | | pretending to be a market. This results in ever more |
| is today. The type of news that will send a stock up | | | | violent reactions to the news of the day that can |
| or down four or five points today would have in the | | | | not possibly be justified when you analyze the |
| 60s and 70s only sent the stock up or down a half | | | | economic realities of both stocks and the market. |
| point. The stock market today resembles to an ever | | | | This assumes of course that anyone is still paying |
| increasing degree a" perpetual overreaction machine". | | | | attention to tried and true fundamental analysis. After |
| It is forever being jerked around like a monkey on a | | | | all why waste your time with this boring stuff that |
| chain. | | | | may only pay off in the long term when you can |
| One constantly hears alleged market authorities | | | | participate in the excitement of the street's latest |
| proudly proclaiming that the market is always looking | | | | cattle stampede. Even if it is heading off a cliff. After |
| forward six months. Not any more! Today's market is | | | | all we are smarter than the average herd animal |
| too stupid to anticipate anything. It does not | | | | aren't we? There is no doubt that we will spot the |
| anticipate it reacts in shocked surprise and with with | | | | cliff before the rest of these clowns. Did you ever |
| ever increasing violence. The question is what has | | | | see a more confused herd of sheep and goats? I |
| brought about this dramatic change in market | | | | don't think they could find a cliff if they tried to! |
| behavior? | | | | My God how did that cliff get there? Help!!! |
| The answer is that the market players and their | | | | Historically the stock market was soundly based on |
| relative strength has changed. And the most | | | | masses of independent decision makers. As time |
| important new factor by far has been the rise of the | | | | passed however, these independent decision makers |
| "propeller heads" as they are fondly called on the | | | | were gradually replaced by the rise of the institutional |
| street. Their common name is Quants because they | | | | investors who for all of their alleged vaunted |
| are engaged in quantitative analysis. | | | | sophistication showed a much greater tendency than |
| By the 80s it had became fashionable for Wall Street | | | | the individual investor to stampede with the herd. |
| firms to raid college campuses for math PhDs. Then | | | | The transfer of market making power from the |
| stick these certified geniuses into a room with a | | | | individual investor to the institutions resulted in a vast |
| high-powered computer and tell them to come up | | | | reduction in the number of independent decision |
| with a sophisticated black-box algorithm that would | | | | makers. The growing tendency of the institutions to |
| enable them to beat the market. And in many cases | | | | concentrate on short term profits and to participate |
| they succeed. And thus computer-generated program | | | | in every cattle stampede went on steroids when the |
| trading was born. | | | | propeller heads arrived on the scene. Their magic |
| The other key players in this drama were the | | | | black boxes based on their secret algorithms |
| day-trader and the momentum player. Both of these | | | | promised and more often than not delivered superior |
| players had long existed but until the 80s they were | | | | short-term returns. Long term investment went out |
| small potatoes. | | | | the window. The future was now. |
| In the 60s when I started out the stock market was | | | | As this bias took over the market the day traders |
| dominated by the individual investor. The individual | | | | and the momentum players exploded in importance. |
| investor in those days was overwhelmingly a | | | | As time progressed many of the black box programs |
| "conviction investor". He researched stocks as best | | | | seeped down the food chain and became more |
| as he was able to and based on this research and his | | | | readily available to them. It was found to be |
| convictions (he liked the product). He bought the | | | | impossible to keep the most successful programs |
| stock. By long-term I mean at least five to ten years. | | | | secret for long. As a result everyone began to march |
| Today long-term means I might own the stock six | | | | to the same drummers. |
| months as long as it doesn't go down 5%. If it goes | | | | During this period the ranks of the old time conviction |
| down 5% I am out of there. | | | | investor with his independent viewpoint and long-term |
| It is important to understand the distinction between | | | | holding pattern shrank to insignificance. And thus was |
| a market and mob-action. A market requires the | | | | born today's whiplash market. Strangely enough for |
| prudent, informed, carefully calculated and above all | | | | an old school investor like myself this new world |
| else "independent-opinion" of the entire mass of the | | | | order is a gold mine. The only thing I have to do is |
| decision-makers who make up this market. In the | | | | hide in the weeds and pick off the game as they |
| absence of these independent decision makers you | | | | thunder pass me in one of their mindless stampedes. |