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| In 1890, the Anchor buggy company of Cincinnati sent out a postcard with a simple black and white line drawing on it. If you focused on the picture you could see the face of a young woman. If you refocused, you could see the face of an elderly poor woman. It is possible to look at this picture and see two completely opposite things. The stock market is a bit like this illusion. Two people or groups can look at it and both of them see something completely different. In my many years as a stock broker, I saw the market as Wall Street saw it. Now that I sit in an academic chair, I tend to see things somewhat differently. Let’s be upfront: When Wall Street looks at the market it sees it through the lens of its business model. It reads, “Make money for me and the firm.” There is nothing wrong with that. This thinking is what has made this country great. You fully understand and accept that when you go into the supermarket or the department store this is the way they are operated. At this point I would like to introduce my daughter-in-law, Heather, into the discussion. Without any formal training in finance, Heather understands the forces at work here and is a master at dealing with them. She is also a tech wiz and knows how to get the job done in a timely fashion. Follow along with Heather as she goes shopping for some clothes for her kids. She goes into a store and finds the appropriate items. She then plugs the prices of those items into an app on her smartphone. Within seconds the phone tells her if these are the best locally available prices for those items. She recognizes that the store she buys from must achieve some level of profit in order to stay in business. She also recognizes that her first allegiance is to her family. In other words, if the store wants her business it has to put on its “big boy pants” and compete. There are six things about the market that Wall Street sees one way, but when I look at the same market I see something different. I will be sharing these observations with you over the next few months. Don’t get me wrong: I am not saying that I am absolutely 100% right and that Wall Street’s view is all wrong. My goal is to help you see that there is more than one way to view the market. I hope this will help you determine which view is the appropriate one for you. The second point I want to make is that my views of the market are not based on what I have dreamed up off the top of my head. All six of these views are currently being taught in business schools across the county. It is also possible to find these views in many books currently found in the popular press. The views have been arrived at after many decades of research and observation by those in academics from across the country. They have been tested in the real world and found to be sound. So why have you never heard them? Partially because professors are not as driven to make their voices heard as are the proponents of Wall Street. Besides, professors are boring. The first item of contention is that when Wall Street looks at the market it tends to see an arena where buyers and sellers come together and make trades in a logical, well thought-out fashion. It sees buyers and sellers evaluating companies based on their business and financial conditions. They then place a dollar value on them. If they can buy cheaply or sell dearly, they will then participate in the market. The alternative view is that the market is a complex structure of interdependent elements where a change in one element affects all of the other elements. In this view there are many more factors impacting the market’s actions than just the logical buyers and sellers. The list of other elements includes the electronic ways that stocks are traded; the institutional participants; the ever-changing list of investment products; the government regulators; and the politicians and media. Think of the market as being similar to a pool table. In Wall Street’s world the cue ball strikes the targeted ball, which moves in a clean and effortless fashion into the pocket that it was intended. This is the view that the value of a share of stocks closely follows the finances of the company it represents. In the alternative view, the cue ball strikes the targeted ball, which then goes crashing into a cluster of balls. The balls in the cluster then careen randomly into all parts of the table. In other words, there are many elements involved and it is difficult to predict or control what follows from the initial event. While all of this may sound like total chaos, the good news is that if you have an understanding of the arena in which you are operating, you have a much better chance of achieving an outcome that is favorable to you and not the cue ball. Next month I will discuss another issue that Wall Street doesn’t talk about. Editor’s Note: George L. Morgan has been an observer of the economy and markets for more than 45 years. He has held faculty appointments at Purdue and Ball State Universities. He was a financial advisor for 30 years, and just recently accepted an appointment as an adjunct professor of finance at the University of Nebraska at Omaha. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. |
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