Market Moods and Why They Swing
In the last post I discussed the fact that the stock market is a paranoid schizophrenic! Most of the time changes in the market have absolutely nothing to do with the underlying value of the firm represented by that stock. Just because the value of Microsoft is $100 a share on Monday and $80 a week later does not necessarily mean that the product that Microsoft puts out has just become junk. No, more likely it's because investor sentiment has changed due to some report, causing the stock price to fall. (Caveat: sometimes prices DO fall because the company is struggling...the saavy investor needs to do his research). The true value of Microsoft is probably about what it was a week ago.
There is however, a school of thought, known by the way as Modern Portfolio theory, that states that the listed price of a stock on any given day accurately reflects a true valuation of that firm. The reason for this is that, due to technology and full disclosure rules, there is nothing that is unknown to the investor, if he does his research. Therefore, Mr. Market has correctly evaluated the price of the stock for you. In other words, there's no use in trying to beat the market because you cannot do it. And in fact, the vast majority of professional money managers do not beat the market! Think about it....you are quite likely paying your stockbroker 1-1.5% in fees to do something you could do yourself for next to nothing!