I've done a lot of reading lately, above and beyond my normal fare of Dilbert and Dave Barry. My goal was relatively simple: to understand the psychology of the stock market so I can make a fortune buying before it goes up and selling before it goes down.
The fact that this understanding has eluded far more intelligent folks than me for decades did not daunt me. Even if I never uncovered the elusive truth of the market, the journey would leave me a better person, and I'd gain a strong sense of accomplishment and fulfillment. But, even more importantly, I knew it would make good material for a column.
As I began my quest, the geopolitical climate was tossing the market around like a rowboat in a storm. (The phrase "geopolitical climate" is a favorite among market commentators. A Google search found 1,410 mentions of it. It makes me feel important to use it.) It was a perfect time to study market movement and investor psychology.
My research notes covered several Post-Its (front and back), but I'll just summarize here. Basically, the market stayed depressed for a long period of time as the U.S. moved closer and closer to a war with Iraq. Here's a sample comment from Reuters in early February:
"Weary investors worried about looming war in Iraq and kept a keen eye open for U.S. economic data on Friday, leaving shares in the doldrums and boosting gold and oil prices."
Day after day, the falling market was attributed to the "looming war." Presumably, investors worried about the war because they did not want to see a war. That seems simple enough, and would lead any logical person to conclude that once the fighting actually started, the market's worst fears would be realized, and prices would plummet. Instead, even before the first missiles were launched, investors celebrated. From the Boston Globe:
"The global stock market's war rally that began more than a week ago in advance of the military action has been like a tide lifting all boats."
All this makes sense, analysts said, if you understand the word "uncertainty." You see, the market hates uncertainty. It fears it. Uncertainty is to the market as kryptonite is to Superman. It's like water to the Wicked Witch of the West, a magnet to a floppy disk, a stake to a vampire's heart. It's clear the market can fear, but once the thing it fears actually appears, its fear disappears because the uncertainty disappears with it. It's all so simple!
Of course, the war rally didn't last long. Once the Iraqis started firing back, the market tanked because it didn't anticipate there would be actual people opposing the coalition forces. Once it was clear the war would last more than two hours, worry set in.
Still, the fighting wrapped up quicker than anyone expected, and the market, with that huge weight of uncertainty off its back, is... well, just about where it started when the war began. See how it all works? See how easy this is?
Now, I know what you're thinking. First of all, the war -- the thing the market feared -- was over. Second, the hideous beast of uncertainty was gone. Shouldn't stock prices be about 100% higher at this point?
See, that's what I thought, too. But that was before I studied the teachings of Iraqi Information Minister Mohammed Saeed al-Sahhaf. For those of you who managed to avoid watching CNN for more than two consecutive minutes during the war, al-Sahhaf is the fellow who faced reporters every day and emphatically explained how well things were going for Iraq. Like, "I triple guarantee you, there are no American soldiers in Baghdad" and "We have placed them in a quagmire from which they can never emerge except dead."
Watching him, the truth hit me like a ton of spam. All my research had paid off, as I had now discovered the secret behind these seemingly contradictory market movements. You see, all the analysts who said this and that about the stock market's movements must have studied under the same public-relations teacher as al-Sahhaf. The philosophy is simple: If you have no idea what's going on around you, just make stuff up. And the more confident you sound, the better.
Thus, the market's movements during this period were contradictory only in relation to what some analysts told us. Unlike al-Sahhaf, they may have actually believed what they were saying, but the truth is they were just as clueless.
And what of individual stocks? General Electric
Don't get me wrong; it's certainly possible to identify events that affect stock prices. But to come up with valid explanations day after day? Not a chance. Ask Robert Solow, who won the 1987 Nobel Prize in economics. Gene Weingarten, who writes "Below the Beltway" for The Washington Post, did:
Weingarten: You know how the media is always telling you not only what the stock market did, but why it did it? As in, "Stocks slipped in early-morning trading Tuesday amid rising fears that legume futures were weakening." My question is, they have no idea what they are talking about, right?
Solow: That is exactly right. They are being paid by the word, however. The fears could also be that Marquette might beat Pitt.
There! A Nobel laureate agrees with me. I'm not quite sure how the fact that Marquette actually beat Pitt plays into all this, but it sounds impressive, nonetheless.
As we've said before, you need to steel yourself for the long run and avoid the day-to-day noise of Wall Street. The events of the past several weeks were extremely significant, but probably had little effect on where the market will be 10, 15, or 20 years from now.
I'll leave you with one last quote from al-Sahhaf, who might as well have been speaking of market commentators when he said, "Who are in control? They are not in control of anything -- they don't even control themselves!"
Rex Moore thinks al-Sahhaf should host a late-night show on Fox. At press time, he owned no companies mentioned in this article. His profile page and The Motley Fool disclosure policy are open 24 hours a day.