I have been an investor for more than four decades. During this time period, I have watched the stock market gradually transform itself from a cathedral of capitalism into a circus freak show. The curious thing about this transformation is that almost no one recognizes that it has even happened. Many ill-informed people will tell you that there never was a transformation. That the stock market was always a circus freak show or a dog and pony show. I know better. I was there when it really was a cathedral of capitalism. You could say I was there at the creation.
The decisive change that has occurred is that the stock market is becoming progressively worse in its central task of providing the public with accurate and reliable figures as to what stocks are worth. A task that it performed well for generations. It is an example of the law of unintended consequences writ large. Very large.
It all started to go wrong in 1971 when the stock market under pressure from the SEC abolished fixed commissions on stock trades. Until that time, the only investors that could day trade were members of the New York and the American Stock Exchanges. The NASDAQ did not yet exist. The members of these exchanges had the invaluable privilege of being able to trade on the floor of their exchange without paying a commission. In those days the commissions were so brutal that they would eat alive any day trader who had to pay them.
As a result of the brutal commission structure, anyone who was not a member of the exchanges was forced to be a conviction investor. You were compelled to be a buy and hold investor. You could not afford to bail out of any trade that went a couple of points against you. This compelled investors to carefully research the stocks that they bought and to hold on to them even if the trade went temporarily against them. The result was that the stock market performed the way that it was supposed to. It provided the public with accurate and reliable figures of what stocks were worth.
Each decade after 1971 saw lower and lower commissions. As the commissions fell, more and more investors felt that they could ignore the cost of commissions. For the first tine, they could afford to guess about the direction of stocks. They no longer were compelled to be conviction investors who carefully researched their stocks. The boom of the 90s coupled with the internet witnessed the full flowering of the day trader. The age of the dog and pony show had begun.
To veteran stock investors the thing that hit you on the head was that the stock market was reacting to every news event no matter how insignificant with a violence that had never been seen before. The stock market was becoming a perpetual overreaction machine. Stocks and the stock market were being jerked around like a monkey on a chain by news reports that in the old days would scarcely move stocks or the market. Knowledgeable investors were noticing something else that the general public was blind to. They noticed that there was an ever-widening gap between the intrinsic value of stocks and their selling price.
The rise of a new investment class of day traders and trend chasers was changing the very nature of the stock market. This new class regarded stock analysis as a waste of time. They would proudly tell you that the only thing you needed to know about a stock was whether it was going up or down. You mindlessly bought whatever was going up and you mindlessly sold whatever was going down. As the conviction investor declined in numbers and power there was no one left to mind the store. There was no one left to keep the market value of stocks from deviating more and more from their intrinsic value.
If this new class of investors regarded traditional stock analysis as a waste of time there was something that they did not regard as a waste of time.
They were obsessed with analyzing the buying and selling actions of other investors. They could not care less about the stocks. In this new world stock analysis was out. Guessing which way the herd would stampede was in. When you stop to think about it. This is very strange behavior. It is much easier to estimate what a stock is worth than to try to figure out which way the cattle are going to stampede.
It is as if the fans in a sport stadium have decided that the best way to find out who is winning on the field is by doping out the actions of the fans in the stadium rather than following the action on the field.
Welcome to the new dog and pony show. The strangest thing about this is that no one seems to have realized that it has even happened. I follow the stock market very closely and I cannot recall the subject even being brought up.
This article is the latest in a series of articles that I have written about today’s weirdo stock market. Those who have found this article of interest should read the latest in this line entitled, “Stupidity Unchained - The Curious Saga Of Today’s Stock Market.”
The decisive change that has occurred is that the stock market is becoming progressively worse in its central task of providing the public with accurate and reliable figures as to what stocks are worth. A task that it performed well for generations. It is an example of the law of unintended consequences writ large. Very large.
It all started to go wrong in 1971 when the stock market under pressure from the SEC abolished fixed commissions on stock trades. Until that time, the only investors that could day trade were members of the New York and the American Stock Exchanges. The NASDAQ did not yet exist. The members of these exchanges had the invaluable privilege of being able to trade on the floor of their exchange without paying a commission. In those days the commissions were so brutal that they would eat alive any day trader who had to pay them.
As a result of the brutal commission structure, anyone who was not a member of the exchanges was forced to be a conviction investor. You were compelled to be a buy and hold investor. You could not afford to bail out of any trade that went a couple of points against you. This compelled investors to carefully research the stocks that they bought and to hold on to them even if the trade went temporarily against them. The result was that the stock market performed the way that it was supposed to. It provided the public with accurate and reliable figures of what stocks were worth.
Each decade after 1971 saw lower and lower commissions. As the commissions fell, more and more investors felt that they could ignore the cost of commissions. For the first tine, they could afford to guess about the direction of stocks. They no longer were compelled to be conviction investors who carefully researched their stocks. The boom of the 90s coupled with the internet witnessed the full flowering of the day trader. The age of the dog and pony show had begun.
To veteran stock investors the thing that hit you on the head was that the stock market was reacting to every news event no matter how insignificant with a violence that had never been seen before. The stock market was becoming a perpetual overreaction machine. Stocks and the stock market were being jerked around like a monkey on a chain by news reports that in the old days would scarcely move stocks or the market. Knowledgeable investors were noticing something else that the general public was blind to. They noticed that there was an ever-widening gap between the intrinsic value of stocks and their selling price.
The rise of a new investment class of day traders and trend chasers was changing the very nature of the stock market. This new class regarded stock analysis as a waste of time. They would proudly tell you that the only thing you needed to know about a stock was whether it was going up or down. You mindlessly bought whatever was going up and you mindlessly sold whatever was going down. As the conviction investor declined in numbers and power there was no one left to mind the store. There was no one left to keep the market value of stocks from deviating more and more from their intrinsic value.
If this new class of investors regarded traditional stock analysis as a waste of time there was something that they did not regard as a waste of time.
They were obsessed with analyzing the buying and selling actions of other investors. They could not care less about the stocks. In this new world stock analysis was out. Guessing which way the herd would stampede was in. When you stop to think about it. This is very strange behavior. It is much easier to estimate what a stock is worth than to try to figure out which way the cattle are going to stampede.
It is as if the fans in a sport stadium have decided that the best way to find out who is winning on the field is by doping out the actions of the fans in the stadium rather than following the action on the field.
Welcome to the new dog and pony show. The strangest thing about this is that no one seems to have realized that it has even happened. I follow the stock market very closely and I cannot recall the subject even being brought up.
This article is the latest in a series of articles that I have written about today’s weirdo stock market. Those who have found this article of interest should read the latest in this line entitled, “Stupidity Unchained - The Curious Saga Of Today’s Stock Market.”
Forty Years a Speculator
Fred Carach
Oakland Park, FL 33309
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