I know a lot of people, myself included, fret about the ups and downs of the stock market, and how it might affect their finances or their ability to retire – or stay retired. I’ve also become aware that a lot people simply don’t understand how the markets work, and this is adding to their fear and frustration.
As a recognized expert in the field of investing, I thought it was my duty to devote at least one column to explaining how all this works. Hopefully, it will make you feel a little better about things.
Let’s start with the Dow-Jones Average. This is a term we hear every day and somehow have come to associate with financial importance, but we don’t really understand why. Allow me to explain.
Many years ago, we’re talking like the 1800s or something, there was a woman named Joan. She was an American, but she was married to the 124th Earl of Glostershistinwistershire of Scotland. He was a most unremarkable earl, accomplishing absolutely nothing of interest in his 103 years of life. Since no one could pronounce his name anyway, he came to be known among the locals simply as Earl Average. When he died, all he left Joan was his title, so she became the Dowager of Glostershistinwistershire. No one could pronounce that either, so she became the Dowager Average.
Joan emigrated to the United States in 1821, and a bureaucratic glitch on her papers as she passed through Ellis Island listed her as Dow. Joan Average. In New York, she found work in a butcher shop cleaning chickens. To earn extra money, she used the chicken entrails to make stock market predictions for a few of the local brokers. When a couple of them got rich off the predictions, Dow. Joan’s Average Chicken Entrails Stock Predictions, as they were then called, became all the rage. It was later shortened to Dow Joan’s Averages. And then, unfortunately, they changed her name to something more masculine because, well, it was 1821 after all, and they didn’t like women getting credit for stuff.
Today however, most market professionals look at the S&P 500 Average as being a more reliable indicator of market performance. So again, allow me to clear up the mystery of that one for you.
Once a day, a group of hand-picked market experts meet at a top-secret, highly secure location above a large Chinese restaurant somewhere in Newark. These professionals randomly select 250 salt shakers from the restaurant below, empty the contents into a bowl, and weigh it. They repeat the process with 250 pepper shakers. If the salt weighs more, they then add up the average value of every stock in the country that starts with the letter “S” and declare that to be the value of the market for that day. If the pepper weighs more, then they do the same thing with every stock starting with the letter “P”. That’s how they arrive at the S&P 500 Average. Stocks starting with any of the other 24 letters are ignored.
Now see – this isn’t all that hard to understand, is it?
Now let’s discuss Market Volatility. Everyone talks about it, but no one seems to understand it. It’s simple really, you just have to pay attention. Here’s an example.
Suppose you want to invest your hard-earned money in the market, so you look around for something safe. “Everyone drives a car or uses machinery,” you say, “so everyone needs oil. That should be a safe bet.” So, you think you’d like to invest in Acme Oil, because you like the name and Wile E. Coyote uses everything called Acme when he goes after the Roadrunner and you love those cartoons. So here’s what you have to pay attention to in evaluating the stock:
Acme Oil is currently trading at 13 times its projected annual gross share multiple dividend weighted average when calculated on a price per liquidated pre-capitalized below-current under-market ratio. But when that’s adjusted by the K-2 projections for the last biennium and then double-weighted against growth under-performance of mid-cap non-emerging market share, it becomes crystal clear that the projections should be much closer to 13.002 times the non-annualized net. If take the annuity uptick on the short sell, then the debenture FICO scores are underutilized and the GDP influx of the P/E ratio isn’t going to become a poison pill. You can then utilize a parabolic indicator to determine that the stock is clearly undervalued and poised for a bull run on the bear market circuit.
So, you invest.
That morning, the Sultan of West Berserkistan, where Acme Oil has its primary wells, wakes up, weighs himself, and finds that he’s lost a pound on his new organic date and oasis water diet. Shares of Acme Oil climb 362%. Two hours later, he discovers that his scale is broken. He has everyone at the scale factory deported to his brother’s country of East Berserkistan, chops down all the organic date trees, and closes the oasis. Shares of Acme Oil plummet 471%. Thirty minutes later, he realizes it was only a dead battery in his scale, and he replaces it. All the workers are brought back, the factory and the oasis are reopened, and Acme Oil stock soars to record levels – until the Sultan realizes that all the organic date trees are still gone. Acme Oil drops to record lows, and is de-listed from the stock exchange.
Between breakfast and lunch your investment in Acme Oil Company stock has gained $431,894 and lost $443,210. Somehow $11,316 has disappeared into the sands of West Berserkistan, and you haven’t even made your bologna sandwich yet. Worse yet, CNN has just reported that the Grand Poobah of East Berserkistan has a pimple and is blaming his brother for having sent it over with the refugee workers from the defunct scale factory, and a massive rubber band war is brewing that threatens to destabilize the entire Berserkistan Region of Central Undershirt. That, in a nutshell, is Market Volatility.
So there you have it – a simplified, beginner’s guide to investing.
Now go forth and prosper.