We have just witnessed another week of falling prices in the stock market. It seems that in spite of all the attempts to prop up the economy through bailouts and stimulus packages, the economy continues to fall. Perhaps a better understanding of what makes markets rise and fall will provide some answers for us.
First, who invests in the stock market? Many think that only the super rich invest in the stock market and there may well have been a time when this was true. However, with many people having pension plans and 401K plans through their employers, there are may more investors. This means that many more individuals have a vested interest in the performance of the markets today than ever before. This explains why there is more attention to this market drop than in the past. This increase in individuals investing in the markets also means there are more investors participating in the market today who do not regularly follow the markets.
This new breed of investor also lacks the knowledge needed to analyze market trends. This means they are not making investment decisions based on sound analytical analysis but instead are reacting to reports given to them through the media and politicians. Therefore, we must ask the next logical question, are these reports based on sound analytical data or is there some other motive involved? Let us take a moment to analyze what motives may be involved.
Media outlets are motivated by ratings. Their interest is in providing a product to which people will want to tune in. If the product they produce were a continuous stream of analytical data, most viewers would turn it off. However, if the media presents a report showing people who have lost their jobs or homes in the current recession, many will tune in and be moved emotionally. If this is what they continually see, it is easy for them to form an opinion that things are extremely bad and that there is little hope. This may lead them to pull their investments out of the market which if done in mass will cause the markets to drop.
Politicians are motivated by getting enough votes to win election to office. If the politician provides a litany of analytical data to the voter, most voters will be turned off and most likely vote for someone else or not vote at all. If, however, the politician promises to provide help to those individuals who have lost their jobs or homes, voters may be emotionally moved in mass to vote for this person. In fact, these voters may be so motivated to vote for this individual, they fail to take the time to check out their credentials or qualifications. When these inexperienced and unqualified individuals win election to office, they will make wrong decisions and the markets will continue to fall.
So what should we do to become educated investors and voters? First, turn off the media. It is important to keep informed but are the sensationalized reports provided in the media actually keeping us informed. Instead I urge everyone to seek out an expert or mentor to analyze their individual financial situation and through proper analysis, help them make sound investment decisions. I know this will come with a price but if the investments prove to be profitable the additional cost involved will be worth it. I also urge everyone to learn more about how economics and markets work. On this blog I recommend the book Basic Economics by Thomas Sowell. Mr. Sowell does an excellent job of explaining economics in a way that ordinary people can understand.
Voters should take the extra time to check out the credentials and qualifications of people seeking elected office. Just because a person is able to get on the ballot and raise sufficient cash to run for office does not mean they are qualified to hold that office. In our country we have the privilege of electing our leaders. However, along with this privilege comes the responsibility of doing our due diligence to check the qualifications and credentials of those seeking office. I urge voters to tune out the emotional pleas for your vote that comes through campaign ads from candidates and instead take time to analyze the candidate. The good news is that with the internet, cable news networks, and talk radio we have more information available today than ever before. However, this information is useless if we do not use it.
There are two types of investors and voters today. Those who are motivated by emotion and those who take time to do their analysis. Emotional investors and voters are susceptible to emotional pleas and promises provided by media and politicians. These have little to do with actual stock values but can create mass panic and dramatic drops in stock values due to massive sell offs as well as the election of unqualified office holders. Logical investors and voters make decisions based on sound analytical data. What we need today are investors and voters that are more informed.
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