The market is riding on a wave of excitement – Cowabugga dude! Wax up those boards and get out on the surf, man. By the way did anyone see Gidget?
A little ways back most everyone in the market was excited as a kid at Christmas. Speculators (Calling them investors would be a gross mischaracterization!) were cramming into sexy industries for fear of missing out on a seat on a “rocket” to the top of the market. Companies were selling applications to enable people to trade at all hours. Pray tell, who wants to trade all day and night? Don’t they have a life?
The “beach” crowd is now turning sour. A sixty inch vertical leap just isn’t high enough. What do speculators want? More, simply more.
Now in all seriousness, this is why markets (securities or any other kind of market at that) are often overvalued or undervalued. When the market turns sour, it is a great time to start the search for bargains. Crowd think draws many participants into joining the herd. Just as people join the excitement on the way up, they join the dirge on the way down. My suspicion is this why lots of investors and funds set up shop outside of the major financial hubs. Did you ever wonder why Buffett doesn’t keep a Bloomberg on his desk?
The markets remind me of a good friend who loved to go to the horse track. How did he pick a horse to win? He went to down to the paddock to look at them! If a horse had the “right look”, he picked it. Forget about the horse’s record in the racing form! Unfortunately, his returns were the average – entertainment.
The markets also remind me of the movie "Money Ball". Many "old school" major league scouts picked their prospects by a variety of shallow methods. One of the worst things I ever heard was the reason why one scout rejected a potential prospect. He said., "He has an ugly girlfriend. He has no confidence." Now that is a Fred Flinstone comment. It is no wonder these guys were rejecting the stats guy who was espousing statistics as a basis. WTF. Are these guys cave men?!
The stock market is much the same as the horse track or pro scouting for many people.
True investors look at company and industry fundamentals. Once they are comfortable with fundamental metrics, they compare how those fundamentals relate to the market prices to make a decision.
With the market’s mood turning sour, it is a great time to dig deep into the fundamentals to find those ugly ducklings who will be tomorrow’s sweethearts! Just like in high school, you want to stay away from the crowd. The crowd can often take you down the garden path and get you into trouble – real trouble.
