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The Market is Going Down; Oh no…….. May 23, 2010

Posted by shaferfinancial in Finance, Uncategorized.
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As we see another example of the efficient market hypothesis failing, profits and revenues are up, yet the market went down [over 10% for the S&P 500].  The generally improving conditions in the American economy was overlooked for the trouble in Greece. Here it is, another pearl of wisdom; the market runs on emotion in the short term.  So you must look at the long term to keep your sanity. If you have some spare funds, then this correction might be a good time to deploy into stocks you believe in and have done your due diligence on.

But the greater lesson is that you shouldn’t be in the market if this type of market behavior bothers you.  This is typical market behavior; dramatic drops and long grinding upswings.

Yield on MMP and HCN is creeping up toward 7%.  While the P/E ratio on BRK has gone below 13.  Berkshire Chairman Buffett noted that all his businesses saw good growth the last month of the 1st quarter.  Railroad traffic continues to improve in April.  All good signs for the economy and for Berkshire.  Due your own due diligence but BRK is cheap compared to its historic valuation!



1. Jed Dahl - May 24, 2010

Did the Efficient Market Hypothesis really fail us though? I personally believe that EMH doesn’t work in short-term trading (periods less than a month). If we look at May in relationship to a quarterly period, the past two weeks will work themselves out in the wash. However, EMH, when kept into long-term perspectives, is right on the money. It is possible for prices to change drastically in the short-term due to speculation, but everything will return to fundamentals (in which all possible information is calculated into the price) when looking at multi-month and quarterly periods.

As you say above, you have to keep looking at Long-term periods. A person can be driven nuts if they pay attention to all the noise the stock market goes through in any give two-week period throughout the year.

2. shaferfinancial - May 24, 2010

As Buffett says [quoting Graham] in the short term the market is a voting machine, long term a weighing machine. We agree on that. However the EMH doesn’t say that, it says the market is always rational, a combination of many people with access to the information making informed and rational decisions. Buffett never bought into EMH, and only fools still do. Jed, you are no fool!! Happy investing.

3. Laura Morton - May 24, 2010

The volume of day trading might have something to say about the erratic movements of the markets. There is still the buy and hold investor. However, more people are entering the market hoping to make a living trading stocks. Many on Wall Street point the finger at the day traders when they are losing money.

4. David C Lewis, RFC - May 27, 2010

Great insights Dave!

RE: EMH, I think the popular vision of the EMH is that “all information is reflected in the price of any given stock”. At least, in the strong form of EMH.

I do think markets are efficient, but that’s because people like Buffet make them so. …that without active traders, no one could invest in those index funds.

I don’t think the recent fall of the market is proof that EMH is invalid. I think it just shows that investing passively for the sake of investing passively is not a particularly valid method of investing.

I’m sure there are times when investing passively makes sense. After all, people DID make money in the mid-late 1990s. But, now is definitely not one of those times to “buy and hold” the entire market.

shaferfinancial - May 27, 2010

Thanks for your post. Gotta point out that any investing strategy that only works at the end of a 18 year bull run, well….. isn’t really a strategy, which has been my insight for quite a long time now. As to EMH, take a look at any chart of late and tell me it is rational! That’s what I keep coming to.

5. Jed Dahl - August 4, 2010

Hey David,

I ran across an article the other day that might be of some interest the other day. It was in Forbes latest Special Issues entitled Investment Guide. The article that caught my attention was Pyschology: are you your own worst enemy?

The article and follows some of the work of Dr. Terrance Odean, Finance Professor at UC Berkeley. In one particular area, Ordean states that the reason EMH doesn’t seem to work for most “small time” investors is because most small time investors are often clueless about what’s going on behind the scenes. “For an individual to not believe that he’s at an informational disadvantage when he’s trading against guys from Goldman Sachs is naive…It’s like deciding to play one-on-one with a professiornal basketball player. You’re going to lose.”

It’s an interesting thought or argument to add to discussion above on EMH.

shaferfinancial - August 4, 2010

Thanks Jed. Yes, the thought that someone sitting at home can have the same informational edge as professional money managers is pretty silly. The emerging science of the brain also indicates that emotions play a central role in decision making!

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