Perhaps
you don't remember this line from the first Jurassic Park movie. It
occurred after the greedy computer nerd had sabotaged the computer
network in order to make his getaway with the embryos of dinosaurs to
be. Because of the sabotage, the protective electric fences of the park
had been disabled and the inmates known as flesh eating dinosaurs were
on the prowl. In order to re-establish network control, the next
computer nerd in charge suggested shutting down the network and going
for a re-boot. With everything dark in the computer room after the
shutdown, and a cigarette dangling from his lips, the foreboding line
was spoken just before hitting the "on" button to restore park control.
With
the events we have just witnessed on Wall Street this week, we are
pretty much in the same shape as the park goers in the movie. Greedy
execs at several of the large investment banks have lost control of
their playground and are now being gobbled up by the stronger of the
species. In the meanwhile, we who are the average investors are seeing
our investments get clobbered by the rapid decline in the over-all
market. For many of us those investments represent our current or
future retirement income sources. It is definitely time for us to "hold
onto our butts".
What
is truly sad (and unfair) about this turn of events is that the
executives, who were responsible for taking on far more risk than their
companies should have borne, are going to skate when this is all over.
They have been enjoying multi-million dollar salaries with the
obligatory annual bonuses. If they never work again, they have the
resources to enjoy a long and prosperous life. Meanwhile, as millions
of average Americans have toiled and put savings away in 401k's or
IRA's, they now see much of those savings evaporating at the over 500
point drop in the DOW as of Monday, September 15th.
But
with all of the bad news, there is a bit of good news for the rational
investor. Recent radical market fluctuations have very little to do
with the values of the companies listed on the exchange. Let's face it.
The true value of large corporations does not ratchet up and down like
a yoyo on a daily basis. The book value of their assets and liabilities
remain relatively constant and stable over short periods. Their
earnings per share do not fluctuate wildly on a day-to-day basis. And
after all, isn't that what the price per share of stock is supposed to
be fundamentally based upon?
So
why do we see all the major swings hour-by-hour and day-by-day in the
markets? I think there are two causes that work hand in hand to
undermine the value of the market. First there is the issue of
"over-information". Players in the market base their actions on what
they think they know, and how what they think they know will play out
in market transactions. Every day as you listen to the analysts, they
come up with reasons for why the market did what it did. Most often,
it's a bunch of words. And those words cause some investors to react
with knee jerks and irrational market responses in their effort to
outguess the market movement. Secondly, I believe that the emergence of
the day-trader has had significant negative impact on what used to be a
predictably stable marketplace. Traditionally, stocks were purchased
and held over longer periods of time. The day-trader is anathema to the
traditional market. Stocks may now be held for only minutes before they
are sold on the next uptick and the profit skimmed. With that kind of
trading it is not surprising that the market hops up and down on a
daily basis. So, if you are in the market, "hold onto your butt!"
