Reflecting on those events, I was struck by how amazing it is that investors can normally take market liquidity for granted. An investor in Procter & Gamble who owns shares believing that the company is worth more than $63, can normally enter a stop-loss order at $40 thinking it is a prudent risk control measure. It eliminates the potential of a complete loss of value. But consider how absurd that would be if applied to other assets. Let's say that a homeowner believes his house is worth $630,000. He instructs his realtor to constantly monitor bids for the house. As long as at least one bid is above $400,000 he'll do nothing. But, if at some moment in time, nobody is willing to bid at least $400,000, then the house is to be immediately auctioned off to the highest bidder. You say no one in their right mind would behave that way, and you'd be right. That's no way to sell a home, a car, a piece of art, a business, or any other asset. Yet that's the equivalent of equity stop loss orders that got executed amid the turmoil.
I don't pretend to know what happened on May 6. My guess is that someone just profitably exploited a glitch, and that rules will be changed to prevent it from happening again. What I do know for sure is that Oakmark doesn't ever have computer programs generating its trading orders; it has people who utilize their common sense. We also don't have standing orders to start selling stocks after they decline; we use our judgment. And as value investors, we are more likely to buy into a decline than we are to sell. Learning why the market fell will make for an interesting story some day, but it in no way changes our view that equities continue to be attractive. If anything, seeing how liquid stocks normally are is a reminder of one of many reasons to be comfortable investing in them.
Click here to read the complete Bill Nygren Commentary on the May 6, 2010 "Flash Crash"
I don't pretend to know what happened on May 6. My guess is that someone just profitably exploited a glitch, and that rules will be changed to prevent it from happening again. What I do know for sure is that Oakmark doesn't ever have computer programs generating its trading orders; it has people who utilize their common sense. We also don't have standing orders to start selling stocks after they decline; we use our judgment. And as value investors, we are more likely to buy into a decline than we are to sell. Learning why the market fell will make for an interesting story some day, but it in no way changes our view that equities continue to be attractive. If anything, seeing how liquid stocks normally are is a reminder of one of many reasons to be comfortable investing in them.
Click here to read the complete Bill Nygren Commentary on the May 6, 2010 "Flash Crash"
