Some Simple Truths

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YOU CAN'T PLAY SOLITAIRE ON WALL STREET

There are days when the market declines for no apparent reason.  When asked why, someone will invariably say, "More sellers than buyers."  I must admit to being guilty of that comment a time or two.  But I finally realized the comment was wrong.  When the market is open, each stock has a bid quote from a buyer and an ask quote from a seller.  There is a buyer for every seller; the people are there.  However, a person can not be a seller if no one takes the other side of the trade at the seller's price.  There is a bidder on the other side, but his or her bid is not at the price the seller is asking.  If a seller wants or needs to sell and the price is not rising, then sooner or later he or she will have to accept a lower price.  That is what makes for a decline.  Perhaps the more accurate way to explain a market decline is to say, "More desire to sell than appetite to buy."  The same holds true, in reverse, for a market rising for no apparent reason.  Then it's, "More appetite to buy than desire to sell."

IT'S ALL RELATIVE

One stock; one price; one moment in time.  For someone who bought the stock at a lower price, that price represents a profit, albeit on paper.  For someone who bought it at a higher price, the same price represents a paper loss.  Someone who decides to sell at a profit, in many instances, thinks the stock has gotten as high as it might and wants to lock in the gain before it drops.  That seller's buyer, on the other hand, thinks the stock will go to a much higher price.  Someone who sells at a loss, in many instances, thinks the stock will continue to go lower and wants to stop the bleeding.  That seller's buyer, on the other hand, thinks the stock is ready to turn around and head higher.  One stock; one price; one moment in time.  With a nod to Albert Einstein, the price is, indeed, relative, dependent on an investor's position in relation to the current price and his or her idea of its next movement.  Each price generates two different views of the same stock's relative value at that time and its future.

UNREQUITED LOVE

Adam Smith in his book, The Money Game, warns about becoming emotionally invested in a stock you own in the following passage:

You can see that all this is leading to another of Smith's Irregular Rules, this one that the identity of the investor and that of the investing action must be coldly separate.  A stock is, for all practical purposes, a piece of paper that sits in a bank vault.  Most likely you will never see it.  It may or may not have an Intrinsic Value, what it is worth on any given day depends on the confluence of buyers and sellers that day.  The most important thing to realize is simple:  The stock doesn't know you own it.  All those marvelous things, or those terrible things, that you feel about a stock, or a list of stocks, or an amount of money represented by a list of stocks, all of those things are unreciprocated by the stock or group of stocks.  You can be in love if you want to, but that piece of paper doesn't love you, and unreciprocated love can turn into masochism, narcissism, or, even worse, market losses and unreciprocated hate.

An investor should try to keep all of this in mind when coming to the market.  In the next blog, we will start exploring the ways investors approach investing in stocks.

The passage from The Money Game by Adam Smith, copyright 1967, 1968 by Adam Smith is reprinted with permission of Random House, Inc.

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