Someone presented me with a graph showing the last 3 major downturns in the stock market (I think it was mainly using the dow and s&p 500) to show how long it took after each time for the market to rebound to its previous level. The basic idea behind the graph was that it takes roughly 3 years and this particular graph was showing a prediction and used march 5th of this year as the date the recovery began.
The immediate skeptic in me said this was not of any real value becuase just becuase somethign can be represented graphically does not me you can use it as a predictive tool.
Here is my question, what about the idea that perception is reality. If enough people subscribe to the idea that the stock market is in recoverey then will it not soar like a pheonix? I suppose iI am describing a boom or bubble but what is going on with the true value of things? Can perception really become reality in this regard?
I understand many basic economic principles but I have had a hard time relating them to the stock market specifically.
Sure, if a lot of people share the same perception on the value of something or the change in scarcity of something then that thing may go up or down in price. Eventually, one or a combination of two things sets in to destroy the false perception: 1. People change their perceptions as more information about the future becomes known, and/or 2. Behaviors adopted based upon perceptions prove themselves to be inconsistent with reality. The last bust is a great example of both 1 and 2 in action. People perceived that investments based upon easy credit would be profitable in the future but changed those perceptions as it became clear that the whole financial system in the US was insolvent, the DOW lost 49% of its value. Similarly, people perceived that the unemployment rates would remain low forever and that they could use this easy credit with no collateral to buy things they would not otherwise choose to do so. Millions of people defaulted on their loans as a result of this.
For more information on the Austrian Business Cycle Theory(ABCT) please check out podcasts, they are all less than 1 hour, by Walter Block available on this website. He uses a simple demonstration using the present value of a $1 bill with differing rates of interest to show how people perceive the future value of something with artifically low interest rates.
Looking for patterns in the markets concerns a practice known as technical analysis, and you’ll want to read up on it to get a better picture of what it’s all about. I usually frequent http://slopeofhope.com/ to get some analysis from Tim Knight. I don’t play the stock market, but a lot of these people get the game.
When it comes to the prices in the market, perception is reality. (for the most part, that’s an oversimplification, but it seems to be the case) If people who tradeand have lots of money value oil at $1000/barrel, it’ll tend to that price. If they value it at $1/barrel, it will tend to that price.
There is no “true value” when dealing with AE. Value is subjective.
The market prices of various commodities, equities, and currencies are typically determined by trader/investor sentiment and supply & demand.
I have always preferd trend timing but the market has been rediculously volital since all of the bailouts have started. It’s extremely hard for me to take any moves in the market seriously any more when it’s monetary foundation being toyed with. Up untill 2007 I have been trading internationally and did pretty good. Since however it’s been straight silver and gold which has also been good. I’m starting to explore a little bit again with foreign ETF’s. We’ll see how it goes… [Y]
As I understand it, the “real” value of a stock is determined by how profitable a business it represents, and of course its long term odds of continuing to be profitable. In other words a stock is ownership in a [hopefully] money making business, and if you own a piece it will make money for you. Just like a well run shoe store or restaurant. A lot of research is needed to find out if it a solid profitable business with good future prospects, such as reading all their financial statements and understanding the tale those numbers are telling, knowing the state of the industry they are in, and, I think the hardest part, knowing about the quality of their management. Is the company run by honest competent people? This is obviously very important in estimating the company’s future chance of success.
That’s what determines the value of a stock to a sane person. However there is another factor that plays a huge part in determining its price. If enough people, for whatever reason however insane, think the price will go up, they buy it. They buy it not for the normal profit that ownership of a sound company will bring, but rather to sell it to the next guy after it has gone up. The next guy buys it for the same reason. Demand for the stock has increased, so its price goes up. This goes on until the herd decides, who knows for what reason, that it’s time to sell the stock. But if enough people don’t want it anymore, poof, no demand, the price goes down. And down and down till the sane people think, hmm as a business investment it’s worth paying this low price, and they buy it.
All this cycle stuff is very questionable. Why does it take 3 to five years to get back up? If we don’t know, who says the reasons that worked then will work now? Maybe it’s a coincidence. Beside, who can guarantee that Obama’s insane/greedy policies won’t dig us in a deeper hole than we have ever been in? After all, at the 1929 crash all the graphs drawn of past performance would have pointed to quick recovery, but FDR screwed that up very nicely.
If enough people think the market is in recovery and are willing to bet their money on that without careful investigation of a stock’s true worth, sure it will go up. For a while. But like a pretty fickle girl who tires of a suitor after a short while, they may tire of hanging on to their shares indefinitely. The herd may decide to sell all at once, as they have so often done in the past, and there will be no one to buy. Exactly as you said, it’s a bubble that may burst any time.
Lately I had putted some savings in gold, specifically ETFs like SPDR.
Now I have some more savings but I’m a newbie too and I don’t know much about reading financial statesments and stuff, so I was thinking in putting it on something tied to the prices of grains. I made a few searchings on the web and I found interesting some ETFs like DBA and DBC.
What can you tell me about that idea? Anybody knows a better way to bet on the rising prices of grains?
Thanks to all! (and excuse me for my ugly english)
ATBC. look at that chart. You will see were we are at in it. It isn’t over yet and it won’t be for awhile yet. Politically we still need a total war. The middle of the war will be the end of the crack up boom. IMO
Yes, I imagine that, but what is the alternative? I will have the same risk if I go and buy gold on my own. I cannot distinguish among similar metals with my eyes or hands :S …
And… besides that problem. I really want to speculate with the prices of grains, I know that I have to take some risks and I wanna do it because this tow things:
1Here in Argentina (and I think it’s the same on almost all the world) we have experienced a lot of climate change (I’m not a socialist! those changes must be a natural phenomenon). So may be those changes pull down the “cosecha” or the quantity of grains offered.
2 I really like to be a contrarian, and there is gradually more and more people talking about gold, and investing in the yellow metal. It seem like there is a bubble comming in there. And when crowds go for it, probably we will begin to see more volatility. May be the grains are less popular, less fashionable and therefore, more stable.
I think we have a language barrier. I don’t understand your question.
Sorry, my english sucks! I was trying to ask you about buying some gold coins like krugerrands. May be there is harder to cheat on gold coins than in bullions
I’m no pro at it but was shown the method years ago by an old immigrant jeweler whom I befriended and did odd jobs for. You’ll need to find the right person to show you or check a few google searches, imagine methods are online now?
Expense shouldn’t be too much, basically a scale, precision lab type glass cylinder with scale, a set of acids in calibrated strengths, and a special stone. Perhaps USD$50-100?
In later posts, you say gold may be a bubble. From the videos I watch by Peter Schiff, it seems that it’s not a bubble, it is people correctly reacting to the death of the dollar.
if you have money please remember that it is VERY EASY to lose it and not get it back ever. Which means speculating and gambling and guessing is only for fools who like to throw their years of hard work [or their parents hard work] into the ocean.
So dont make any hasty moves. Your comments show that you have a beginners understanding of economics. There is no rush. Learn about what you are interested in investing in [and about general true economics from this site] until you are so sure of what will happen to grains or whatever that it seems to you that of course you will make money buying them.
Or you could find a reliable proffesional expert to help you invest. I have no idea who that may be or how to find him.
Do some research online. buy maybe a 1/10 oz coin and handle it. Play with it, get a feel for it. Look up all the tests you can afford to do online and then do them. The ultimate is when you go to sell it. If an experienced trader accepts it, it is probably not a fake. Kurgerrands are the cheapest way to invest, but they also sell back far under spot. American Eagles right now sell over spot. The rest are around a 4% spread. You will buy 2% higher and sell 2% lower. Physical gold is better to have, because you don’t have to demand delivery, you can trade it right now to whomever will accept it in trade.
Smiling dave is right though. Don’t gamble with money you can’t afford to lose.