Motley Fool Staff
Dec 20, 1999 at 12:00AM
The market told us that, as far as it can see right now, Amazon.com (Nasdaq: AMZN) is deserving of a rise of about three bucks, perhaps because Jeffrey Bezos, its CEO, was named Time's Person of the Year. It told us that America Online's (Nasdaq: AOL) prospects deserve on this day to be $2 brighter. And it told us that Celera Genomics (NYSE: CRA) should go up $14, or 15.91%. Perhaps, come to think of it, it was the loud voice of the market rattling those windowpanes, after all.
What the market told us. Who, or what, exactly, is the market? What does this really mean -- when we ascribe human traits to this non-human thing? Does it think? Does it tell us things? Is it like a Greek god? What are we listening to, when it speaks? Are we to believe it for what it says today? And is that different from what it says over the long term? Is the market always right?
In a sense, the market is always right. As experimental psychologists are fond of saying, "The rat is always right." That is, the rat, when he (or she! after all, female rats are animals, too!) chooses to turn left in the maze, the befuddled investigators in their tatty smocks have to accept that fact. It does no good for them to rail at the poor thing: "Hey! You're supposed to have gone the other way!" The market, like the rat, moves up or down, and we, in our tatty smocks, watch and hope to know why, and what it will do next.
There is a difference, though. The behavior of that great creature, the market (a market in any given stock -- not just of the market as a whole) is made up of the small behaviors (the buys and the sells) of the investors -- which is to say: it is created by us. It is as though there were a million factors at work between the scientists and the rat. The flutter of an eyelid, the twitch of a lip, the distant sounds of music drifting in from an open dorm room window, the gastric juices and acidity ("ooh, I should've taken Rolaids" thought the rat as he peered around the corner), each of which was contributing in some small way to that left-hand turn.
Similarly, the market does what it will, subject, presumably, to a million different factors. The fund manager who feels he's been left out of the Internet ride long enough, succumbing to the pressure of his peers. The geneticist in Des Moines who triumphantly makes his first foray into the stock market by buying what he knows. The Iomega holder in Tallahassee who, weary of the same old management team and the attendant turmoil at the company, decides nonetheless to hang on.
The assumption that Fools make is that there is, over time, logic underpinning the moves underlying a stock's price. That is, that companies that are good values will, over time, have that value reflected in their price, and those that aren't good values, or that are unable to respond to changes in the competitive landscape, will drop. It's a just world, in a way: those companies that are thought to be the best, become the best investments.
In listening to the market, it is as though we investors sit, at the cusp of the millennium, in the grand Coliseum, watching the gladiators fight before us. Those gladiators are the companies in which we invest. We give our thumbs up or thumbs down -- each of us -- and taken as a whole, the ayes or the nays have it. If we've voted with the crowd -- and have done so before we know what the rest of the crowd will do -- then the market tells us that we're right. The light of hundreds of thousands of bright minds now shines upon the arena and illuminates one or another of the gladiators.
Put less grandly, the market speaks like Richard Dawson in The Family Feud show from a few years back, in which contestants were asked to match their responses to the audience-at-large. Name "something you can kick!" A ball! A dead horse! A dog! A bad habit! "Survey says...." Dawson would intone, and turn to look at what the audience had decreed; if you got it right, if your choice coincided with one of the choices of the audience, then you got it right, and were rewarded with the ringing of a little bell. And, of course, with money.
We come back to those two little words, "over time." They are, as inveterate Foolish investors know, critical. For none of us would care to predict the moves of any of the stocks in the Rule Breaker Port on any given day. We don't think it's possible to predict the moment-to-moment future, anymore than it is to predict whether a rat's whisker will move up before it moves down, or whether a gladiator will advance with his left foot before his right. Over time, we believe that the judgment of the market -- of our fellow investors -- will reward great companies with high valuations.
But who, then, are these others? Who are our fellow investors, whose bright minds we trust to illuminate the Coliseum?
According to The Investment Company Institute and the Securities Industry Association, about 49.2 million U.S. households, or 48.2 percent, own equities either in mutual funds or individually. The New York Stock Exchange's Survey of Consumer Finances indicates that, for its most recent data period (1995), people who own individual stocks represent a minority (40 percent) of all those who own corporate stock (via institutions such as mutual funds).
What this means is that there's a roughly even mix of institutions and individuals making their buy and sell decisions, spectators in the arena who are profoundly affecting the match. The 'spectators' actually influence the outcome by driving the share price up or down. But it is, at heart, the company -- the gladiator -- that must do the fighting.
Our job as investors is to evaluate those companies, and to predict the future as best we can.
If you listen closely, you can hear the roar coming over the stadium walls from the next millennium. We hope to hold well into the future the fighters that will prove to be the nimblest, the strongest, and the most successful.
The market is rattling my windowpanes once again. Or is it the mistral?
Fools on TV
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