I’ve recently been hearing predictions that things will get so bad that the financial markets will have to be shut down for a week or two to help stabilize them (Buffett has said he would be happy if the markets closed for years at a time).
The last time this happened was post 9/11, and although the market sold off violently upon reopening, it subsequently rallied into year end. Of course, it then sold off substantially in 2002 as the excesses of the tech bubble continued to be exorcised and the effects of a recession were priced in.
Market participants are currently being subjected to violent price swings the likes of which have never been seen at least in recent history. Whereas a 400 point move was big headlines just months ago, it is now the daily norm. On the one side, everyone save for a handful of disciplined and brave (masochistic?) value investors is too terrified to buy. The short-term negative reinforcement for doing so has been severe, much like the rat in the Skinner box who gets shocked every time he grabs for the food.
On the other side, we have the same terrified retail investors selling because they can’t take it any more, along with mutual fund redemptions. I also expect that many mutual funds, who end their fiscal year in October, are fooling around with their portfolios for tax and window-dressing reasons. Hedge funds are failing left and right and being forced to liquidate. Then there are margin calls, also resulting in forced liquidation. None of this - NONE - has anything to do with the underlying value of the businesses listed on the stock market.
John Maynard Keynes, esteemed economist, had these observations nearly a century ago:
“the conventional valuation of stocks is established by the mass psychology of a large number of ignorant individuals” resulting in “a battle of wits to anticipate the basis of conventional values a few months hence rather than the prospective yield of an investment over a long term of years”. The entire Wall Street “research” machine plays this game - trying to guess next quarter’s results, and most market participants obligingly drink the Kool-Aide.
Over time, only the business value matters. Hence, as Buffett/Graham say one must never compromise their natural advantage as a stock market participant: the ability to ignore market quotes and wait until Mr. Market gives them a high bid. If you are levered or on margin, you no longer have the luxury of making your own sell decisions. Too, if you are captive to the market’s emotional warfare you also give up your natural advantage.
Keynes: “the organization of the capital markets required for the holders of quoted equities requires much more nerve, patience and fortitude than for the holders of wealth in other forms … some (investors) will buy without a tremor unmarketable investments which, if they had (continuous) quotations available, would turn their hair grey.”
I.e., simply because we get price quotes in the markets every second of every week day, it is extremely difficult and emotionally painful to hold public equities, especially in unprecedented times like these. If you owned the same businesses as a private investor and never received a price quote of the businesses value, what would you do? Probably sleep alot better. Probably make better decisions.
Maybe closing the markets for a while wouldn’t be a bad idea.