It is said that the market moves between greed and fear. In other words, the stock market is an irrational beast. The most irrational component of that beast is the individual investor. For the most part, individual investors are cannon fodder for the banks, for large investment firms, and for Wall Street insiders. The market needs you because that’s where they get all of their money.
Here is some general advice about share prices from an expert. This is taken from a July 17, 2009 article by Kenneth J. Gerbino of Kenneth J. Gerbino & Company. It is called The Next Five Years.
There are always major and minor causes to all effects. When one is dealing with the stock market and the economy the major causes that run the show are:
* Money Supply
* Interest Rates
* Government Intervention (taxes, regulations, permits, trade barriers, etc.)
* Government Spending (high or low percent of GDP, deficit policies etc.)
The above, in turn, influence the following:
* Stock Prices
* Employment Rates
* Inflation Rates
This is not the Word of God. This is one expert’s opinion on the factors affecting the price of shares and the movement of those prices. They are not the factors that most individual investors are likely to follow. And if you did follow all of these factors, you could still lose money in the market. The market is designed for you to lose your money.
What Influences Individual Investors?
One would be wise to pay attention to the influences listed by Mr. Gerbino but we know that even the smart money is often wrong. There are numerous quotes from experts in and out of government about how things were about to turn around just before the crash of the Great Depression. There were similar optimistic and wrong-headed things said by experts just prior to the housing bubble bursting and all that followed.
Even now, we continue to get optimistic information from sources we should be able to trust, sources talking about green shoots. But these are the same sources that told us the bust was never going to happen. In some cases they are the same sources who were complicit in bringing about our current troubles. Unless you want to become an expert in investing, you need to find sources you can trust.
Individual investors are unfortunately mostly influenced by government proclamations and by advice from the financial talking heads on TV. Many of those talking heads either a) do not know what they are talking about or b) are deliberately giving false information. See Jon Stewart’s confrontation with Jim Cramer to see someone who does both of the above and in spite of being busted by Jon, is still doing it.
One strong influence on individual investors is a rising price. A stock may be rising on solid data or it may be rising on rumor or false information. The problem for the individual investor is that she is likely to jump in as the stock is rising. These unwary investors will cause the stock to go up even more. But the corporate investors are waiting for you to bite and as soon as you do, they will sell their considerable holdings and you will find yourself holding losing shares.
Any investor should be very careful about making decisions based on government proclamations. Any time Ben Bernanke makes some positive statement about the economy, the DOW goes up. He may be mistaken. He may be lying. But the stocks will go up. Anyone depending upon government statistics to make their buying decisions is in trouble.
It is the government’s job to make the citizenry think that things are better than they are. Most of the stats coming out of Washington, even with Obama in the presidency, are exaggerations. I don’t want to suggest that the government might lie to us. If you want to have a better idea of what unemployment really looks like or what our debt really is, you might go to John Williams’ Shadow Government Statistics: http://www.shadowstats.com/
Where to Turn?
As an individual investor, you may still need to depend on expert advice. How do you know who to believe? One thing you can do is look at any given expert’s track record. You would have to be brain dead to listen to Jim Cramer. He has shown himself to be way off in his predictions and he has admitted to manipulating the market. During the .com bubble, TV experts would tout stocks that were held by companies they worked for. This is probably still going on.
Look at various free investment newsletters and look at the track record of the writer. Many people were very much aware of the coming bubble and warned about it years in advance. They were generally shouted down by the financial clowns of the major media. Those who saw what was coming are the ones you want to find and listen to.
In the current downturn, buying stocks is more dangerous than ever. A savvy investor will look for market segments that are either recession proof or do well under recessionary influences. Blue chips may not be a safe way to go right now. In this environment, even safe investments, like treasuries and bonds, are not as safe as they used to be.
Drug companies are generally doing well, although they are very volatile and I would personally stay away. Energy is usually a safe bet in any economy. Oil prices are going up and probably won’t be going down very much in the near future. In spite of the downturn around the world, demand for oil is likely to outstrip supply in the short term and even more in the long term.
Energy is part of a general market segment that will do well in this downturn. That segment is commodities. People need energy and they need food, regardless of the economy. One good bet might be a commodities ETF or mutual fund.
A good hedge against a falling dollar, deflation, or inflation would be precious metals, especially silver and gold. These are also within the commodities market. Both individuals and nations will turn to gold when times get tough. China has secretly been buying gold and will probably continue for some time.
While the government claims to want a strong dollar, in fact we do not want a strong dollar. Dollar weakness decreases our real indebtedness. China and others buy our debt at a certain dollar value and then we can later pay off our debt at a much lower dollar value. China knows this and is chiding the U.S. for not strengthening the dollar.
I am not an investment advisor. I am an amateur investor and I depend on the advice of others to help me invest wisely. I get most of my information from free newsletters or from sites that present articles from many different investment advisors. I am primarily invested in commodities: energy, agriculture, and mostly precious metals. I was hit by the recent downturn along with almost everyone else. However, in terms of my portfolio total, I never moved into the red.
Be careful. The stock market and those who know how to play it consider the individual investor as a source of their wealth, nothing else. They will do everything they can to get you to buy into their game. You are nothing but a source of income and you must guard against falling for their scams. Look for people who are themselves making money in this economy and find out what they are doing.