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Todd N Kenyon
Todd N Kenyon

What if they closed the market?

October 24, 2008

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.

About the author:

Todd N Kenyon
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 2.8/5 (13 votes)


Budlab - 8 years ago    Report SPAM

In my view, markets need to be kept open to allow the market forces to "work out" the fair values of good and bad securities. What we need is more sensible leadership and valuation transparency. This is a bit like a messy divorce; where assets need to be properly identified, valued, and divided into understandable portions.

Warren Buffett has described the recent American economy like an athelete who has collapsed of cardiac arrest and needs recussitating with a defibrillator. But, what if the cause of this collapse is a tumor close to the heart? Tumors that originate in the heart are rare, but can be either benign or malignant. Because the heart is such an essential organ, even benign tumors can be life-threatening. Treatment of the benign myxoma is usually done by surgical removal of the tumor. Treatment of malignant cardiac tumors usually involves radiation, chemotherapy and management of complications.

The botomm line is this: If these "toxic derivatives of unknown value" are the tumor around the heart of advanced economies, then they need to be effectively identified, shrunk, and safely sugically excised from the healthy portion of these economies.

Until a comprehensive treatment plan is devised to include radiation, surgery, and rehabilitation, the current infusion of extra blood is just keeping this patient barely alive. http://www.gurufocus.com/news.php?id=37114

Closing the market would be like cooling the patient on cardiac bypass until careful surgery is performed.

The Labitan plan I propose and share here involves:

1. effectively identifying, shrinking, and safely sugically removing the most toxic derivative securities from the healthy portion of these economies.

2. developing a comprehensive treatment plan to include radiation, surgery, and rehabilitation of these economies.

3. developing new standards of capitalization or debt/equity ratios.

4. providing a crash course in the sensible leadership and monitoring of "free markets" to both presidential candidates.

5. teaching sensible best practices to the next generation of business students.

Feel free to pass this on to Washington.

Bud Labitan, author of "The Four Filters Invention of Warren Buffett and Charlie Munger. Two Friends Transformed Behavioral Finance." which is available from Amazon.com The genius of Buffett and Munger's four filters innovation was to "capture all the important stakeholders" in one "multi-variable" four step process. And, they did it with very minimal use of debt!

karin schoenherr
Karin schoenherr - 8 years ago    Report SPAM
I don't know why the markets should be closed. Don't get me wrong, for my stocks that I already bought I am not worried if the market is open or not.

But why should we "forbid" Mr. Market to sell his stocks? I would love to buy more from this nice, insane guy.

Like WEB "told" us: The market is a little like god. He loves those who help themselves, but unlike god, he don't forgive the unable people.

I think I have nothing to add.

Happy investing!
AlbertaSunwapta - 8 years ago    Report SPAM
Close the market? They did already - for shorts.

Buffetteer17 premium member - 8 years ago
Epicahab - 8 years ago    Report SPAM
Just stop looking at the VIX and strengthen your resolve. Worked for me.
Adamcz - 8 years ago    Report SPAM
Doesn't matter to me whether markets are open or closed. I guess it would bother me not being able to buy more in the meantime, but I could care less whether price quotes exist every day for the companies that I already own. In fact if there were a year without price quotes, I'd probably gain 30-60 minutes of productivity a day - that's a fair tradeoff for losing the opportunity to buy during that period.

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