What are 7 billion people eating for breakfast?

 A colleague of mine used the phrase, “I don’t know what 7 billion people are going to do tomorrow” to answer the question of “What’s the market going to do?” I thought it a very simple and profound answer to a question many people ask.   There has been a lot of up and down in the market lately, and most people have a little anxiety about that.  Trying to provide some perspective, I offer the following.

 

A widely used way of measuring market volatility is the CBOE’s Volatility Index (VIX).  Tracked since 1993, the measure gives a short term (30 day) picture of investor’s fear.  Here are some instances to give you perspective:

 

  • Highest  80
  • Lowest  10
  • Sept. 14, 2001  42
  • Fall of 2008  80 twice, once after Election Day
  • U.S. Debt Downgrade  48

 

 

 Because the Index measures relative volatility, one can compare the numbers across years (in other words, no need to adjust for inflation). The truth is that no one knows what 7 billion people are going to do today, or any day. Are they going to buy McDonald’s or Burger King? Are they going to eat corn or wheat flour? How much electricity will they use? Companies spend a lot of time and effort making predictions, and they can hold generally true over longer periods of time, but trying to predict the economy, and therefore the result of the markets is a fool’s game. I highly recommend reading a couple of books. The first is a primer on financial education, Rich Dad, Poor Dad (Kiyosaki) which gives people the basics of money, which most people unfortunately are never taught. The second is a book titled The Investment Answer (Murray, Gordon), which is a very concise instruction on how to manage your paper investments. Reading both will give you a good understanding of what to expect from your investments, and should help calm your short term fears.

 

The bottom line is that the markets are zero sum games. In other words, for every person selling a stock or bond, there is a buyer. Once thinks the price is going to go up, and the other thinks it can go down. There are literally thousands of people that research publicly traded companies, and if an investor is going to analyze specific securities, he or she is essentially saying, “I’m smarter than those full time people.” Really? The same colleague mentioned above likes to blame Investor Pornography for this. Turn on the full time news channels (SNBC, Bloomberg TV) or watch the commercials for all of the do it yourself stock trading, and you’ll quickly see examples of what I mean.  The reality is that the more hype/drama they create, the more people watch and buy. This has NOTHING to do with the underlying economics of the companies or their performance.
 
  
Relax.  This too shall pass.  Don’t cause yourself unnecessary stress over things over which you have no control.  Understand that you are in the looking at the long term, not tomorrow.  And for God’s sake, turn off the TV!

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