Refresh the Basics Part 2

February 1, 2014

Investment Newsletter for the end of January, 2014

I am continuing with my theme from last month of refreshing the basics.  It never hurts to remember the core issues.  I also have several new clients.

Before I start, I need to discuss the month.  It stunk.  It was looking fabulous until the very end of last month.  There was no clue that the Dow was about to go down 1,000 points.  The news was all rosy and the experts were optimistic.  It was not possible to time when the decline would happen.  None of you should be surprised.  I have been talking about it for half a year.  So now what?  There is no way to determine how deep this downturn will go or when it will recover.  I know that if I stay out, I will miss the rebound.  I will therefore honor our agreed allocation.  In summary, I will rebalance and buy more stock as it goes down.  When it goes back up, you will be richer for it.

The value of the stock share is not just based on the company value.  I was over simplifying last month to make a point.  The more correct answer is that the stock price includes peoples’ expectations as to future earnings.  People can be irrational, filled with fears and prejudices, be over optimistic, etc.  These expectations can rapidly change.  This change in expectation is why the stock market fluctuates even when companies are relatively steady.  You see the same expectation changes in real estate prices, gold prices, and every other investment.  Expectations can change dramatically.  Greed can turn to fear in one day (the stock market tanked when the towers were hit in 2001) or over longer periods like what is now happening to gold prices.

In my opinion, Bitcoin (some type of digital currency) is the next collapse.  I can not see any economic substance to it.  It has no reason to exist and has no assets or country behind it.  It is being created by private companies in computer programs.  When greed turns to fear, people will not touch Bitcoin with a pole.  Bitcoin will have no value.

A rational decision process cannot predict irrationality.  I cannot analyze my way to predict the next greed fit or fear storm.  I can not predict when Bitcoin will collapse.  It may be next month or two years.

I do not believe that anyone can predict the stock market.  The stock market is the collection of all stocks.  Each stock is going up and down based on millions of buyers and sellers bidding the price up or down.  These buyers and sellers are motivated by greed, fear, retirement planning, education planning, or may be computer programs.  It is a mix of different reasons, knowledge, and understanding of the market.   It is not logical in the short term.  In the long term, prices are based on company profits.  Stock prices do not have patterns like the technical traders say.  Any new information about a company is instantly reflected in the stock price.  It is old news before you ever hear it on TV.

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