Wednesday, October 8, 2008

Two Bad Stock Market Days in a Row

Lots of red ink has been flowing two days in a row now. According to Jason Zweig in his book Your Money and Your Brain, “after two repetitions of a stimulus ... the human brain automatically, unconsciously, and uncontrollably expects a third repetition.”

If Zweig is right, then we must all be anticipating the end of the world. Stocks will keep dropping every day until there is nothing left. Things really are different this time. The sky is falling.

All kidding aside, I do find myself looking for someone authoritative to explain that the world’s financial problems are now under control. I’m not sure who qualifies as sufficiently authoritative. President Bush does not. Warren Buffett might be good enough, but he’s too busy buying up businesses at fire-sale prices.

For now, the financial system is still in surgery, and we’re in the waiting room hoping to hear from the surgeon soon.

6 comments:

  1. Jeremy Grantham (who's involved with a Vanguard Fund) has apparently been saying for a while that the S&P 500 would reach a fair value of 1100 by 2010. It's looking pretty close to a couple years of reasonable growth away from that :)

    People keep talking about a recovery but that doesn't make sense if they were paying 20 or 30 or 50% too much in the first place... Only time and true increases in value will "recover" that.

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  2. Richard: If Grantham is right, then it will take quite a while before stock prices recover. However, the track record of stock price forecasters in general is pretty weak, and I don't know how to determine which ones will be right.

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  3. If the whole worlds financial system is to fail then the last thing we need to worry about is our investments! more how to put food on the table.

    As hard as it is I am scraping what little I have in cash and buying the index to average down. I know, it feels like catching a falling knife! ouch.. but in 5 years I hope it will have made sense...

    Greg

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  4. Greg: I'm with you on this one. I'm investing what little extra money I have in stocks on the assumption that there will be a recovery. I expect today's prices to look low in a few years.

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  5. Interesting idea from Zweig. I wonder how this squares with the idea that people distort a 50% chance situation based on past results. For example, if someone has flipped heads 10 times in a row, they probably think a tail is due to come up. In reality, assuming a fair coin, the next flip is just as likely to be yet another head.

    Two consecutive heavily down days in the market is a little different, perhaps, in that people don't see the market as random as a coin flip.

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