Are you going back to the stock market game?

October 22nd, 2009

Or are you taking your money to the casino?

It’s pretty up and down at the moment in Wall Street. Look what happened last week to Alcoa. The company announced that it had achieved a tiny profit, whereas it had been expected to post losses. The news sent the company’s stock soaring, because the investors perceived the report to be “positive” when they are surrounded by “negative”.

Why is it significant?

What possible significance could there be in an infinitesimal quarterly profit of a few tens of millions of dollars in a company whose quarterly turnover is almost $5 billion? What meaning could there be to a profit so small that it could simply be the result of a casual accounting decision about how to calculate amortization at any one of the company’s plants? Naturally, none of that arose in the discussion. The main point was that the “expectations had been beaten.”

The information flood

With the advent of the news channels and the internet and our entry into the “Information Age” the amount of real-time information flooding in from the marketplaces has hugely strengthened the casino aspect. New financial statements or corporate announcements are released continuously. Expectations are formed well ahead of events, creating an opportunity to gamble on the outcome: whether it met these “expectations” or not. This is a gamble that strengthens the emotional side of the markets.

The game of “Gains and Losses”

Is the news better than expected? Players “vote” for gains. Did the result fall short of expectations? Players “vote” for losses. The aspect of cold-eyed measurement, and attempts to interpret the news in terms of share price, are abandoned in favor of roller-coaster emotionalism.

Urges rule

In any stock market, no matter where, there will be periods when economics and rationality rule, facts and numbers hold the day. And there will be times when speculative urges come to the fore and move the markets more than reasonable analysis. There is nothing anyone can do about it; that’s the way it is.

Your investment approach

Every investor has to decide on his own approach and his own reason for playing in the stock exchange. Is he a long term investor? Does he do his homework and invest strictly by economic criteria? Or is he a hit-and-run player trying to ride the wave before it crashes over his head? Whichever style one chooses, success cannot be assured, and there is no formula that will guarantee profits.

The Intel story

Chipmaker giant Intel published a financial statement last week that “beat expectations”. Following the report’s release, Intel’s share price rose, albeit not dramatically. In October 2008, just before profit and sales began to decline, Intel was trading at $17 per share. At its lowest point since, in March 2009, its share had fallen to $12. It subsequently rallied strongly, rising to $21 per share. No question about it, emotion is ruling the day in the investment community.

This entry was posted on Thursday, October 22nd, 2009 at 5:00 am and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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