When you go to a doctor, you expect him to examine you, make reasonable tests and tell you what you have. And if you are suffering from cancer, you expect him to explain each possible treatment option and their chances of success. You certainly don’t expect him to run around the office with his arms up in the air screaming: “it’s terrible! You are going to DIE!!!!”.
You all expect this from a doctor simply because he is a professional; he knows what he is doing. Wall Street big guys are all CFAs with MBAs and FRMs and all the other diplomas you can think of. They are actually paid better than the doctor. So I guess we can expect them to be and act as professionals, right? So, tell me why stock markets crash under investors’ uncontrollable panic??
It’s because there is a deep secret behind this big Masquerade. Don’t think that I’m going to tell you that the guys on Wall Street are imbeciles. In fact, they are pretty smart and are professionals. And when the market goes bust, don’t tell me that these guys are as stupid as the small investor and try to liquidate all their positions the same day. They would be fired within seconds.
The problem with stock market crashes are not related with the big institutional investors controlling the game; the problem lies with the media which doesn’t understand what is going on. They would rather use words such as panic, collapse, apocalypse, recession, “nowhere to hide” because they sell better.
But the Media can’t influence the stock market completely. It’s neither me nor you with a few thousand that actually creates an important force on the market and make it goes up or down. So why do stock markets crash? Here’s the hidden truth about any market slump:
#1 Short Sellers Are Like Hyenas Watching Their Prey
If there is one thing that should be banned forever on any stock market is short selling techniques. This is betting that the economy is going down while we should all work together and hope that it goes up. This ultimate contrarian train of thought has become way more than a case of a few isolated traders. There are now hedge funds and portfolio managers using short selling as part of their core strategies. This is why short sellers will do everything they can to push the market further down the drain (hey NIN 😉 ). When the market is about to swing into the red, short sellers are jumping on their prey like hyenas and make sure there are no survivors. This is one reason why markets suffer from slumps.
#2 Technical Analysts Are Pushing Tendencies
Helped by the swings created by the short sellers and contrarians, technical traders will give an additional push to the market so it keeps going up or down. Here again, institutional funds are managed according to technical metrics and will contribute greatly to push a stock up or down depending on the main trend. If they detect that the market goes down suddenly, their metrics will indicate that they should sell automatically. I’ve previously explained the Ivy Portfolio which works based on this technique. Since they are playing with big sums of money, I really start to wonder if they following the trend or are creating it…
#3 Hedge Funds Are Looking For Spreads
What if you can’t predict if the stock market will jump or crumble but you are 100% sure to make money if there is volatility on the market? This is exactly what you can do if you are playing with ETFs and their underlying stocks or with stock options (calls and puts). Hedge funds are part of this group of institutional investors able to influence the market on one way or another.
What you should remember when the market crashes is the following:
#1 It is not because the professionals on Wall Street panic, it’s because some of them are looking to benefit from a market slump.
#2 While you are losing money, someone else is making some!
I guess this is why it is so important to keep your investments and ignore temporary market hurricanes!
Good advice – You don’t lose it till you sell it!
Good article – and thanks for sharing! I think if people knew that most of the time, these market movements aren’t a breakdown of fundamentals but rather the movement of big money positions.
That’s why I love dividends – the market can drop 500 points, but I’m sure I’ll still get my regular paycheck!
Good post man. The key is not to follow the money, but more often than not, go against it 🙂
The problem is the average Joe who thinks he is smart enough to make money investing in individual stocks. In other words – to beat the market. LOL Of course, as with anything else (housing as another example) when shit hits the fan, the average Joe is looking for the villain: banks, shorts, technical traders … The average Joe never looks in the mirror, to face the real moron. Neither he does have sufficient brains to realize that his elected officials, who push interest rates lower and lower every year, are in fact the ones who forced him in the first place to be looking for more risk.
I think they also crash because of short investing horizons. Many people have come to think of the stock market as being like a savings account–the value is at least stable, and will rise over time. But if something happens to shatter the calm, they panic and hit the life boats. That takes the whole market down if enough people do it.
The Wall Street crowd can be given to this kind of behavior as well. One bad quarter can hurt a fund manager (or at least make them look bad) so they get caught up in trying not to lose money. That can mean selling in a soft market. Mutltiple that times hundreds of money managers and you have a full blown crash.
The patient money approach would work best for the whole market. If we could think of investments in terms of years or decades, the way we do with retirement investing, the whole investment universe could be much more stable.
Very enlightening! I haven’t sold any equity over the last few months and most people I know are also holding.
Most analysts and talking heads are just talking their book. If you have hundreds of millions of $$$ under management, the last thing you’re going to say is SELL! SELL! SELL!
I’m up to my eyeballs in dividend paying equities, and the epileptic twitchings of the chart aren’t all that important to me, but I would strongly recommend THE Big Picture’s 10 rules for surviving a financial crash. This is worth printing and sticking to the door of your fridge:
http://www.ritholtz.com/blog/2011/08/downtown%e2%80%99s-rules-for-surviving-a-crash/
Love the article! Definitely agree that the news sensationalize things as they need to sell their infoproduct but it’s the herd mentality of the masses that is causing quite an upheaval, upon themselves i would say…
Another factor is the derivatives and other leveraged securities allow big investors to move the market disproportionately, compared to stock investors. This has ratcheted up the volatility in the past couple of years.