Market volatility explained?

Even the most hands off investors have got to be concerned about recent market volatility. Besides the dime-a-dozen opinions of top- down analyzers, I keep track of some bottom up observers from the trenches. Not for fast trading information, but for early warning or confirmation of trends. CNBC Jim Cramer may be an egotistic clown, but his "Mad Money" opening comments have gotten more thought provoking recently.

Last week he outlined the history of last couple years as driven by his fellow hedge funders yanking things around (a few paragraphs down) starting with "Go back to the colossal selloff that began in 2008. The whole thing started because "...

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Then after years of playing the know-it-all, yesterday he called the rally and indeed the market as irrational and untrustworthy:
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Reply to
dumbstruck
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[snip]

untrustworthy:

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Yes, but Cramer was a hedgie. The vix is today's M1. Ten years from now, it'll be something else. Not all stocks are volatile, and of those that are, if it's up 5% one day, then down 5% the next, why get bent out of shape over it? It's the CEO-orchestrated disasters that bother me. The concentration of money into the hands of funds, and the insane leverage some use, is the source of volatility, much as Cramer says. To a hedgie, that's his paycheck. And economically, one can question, I believe, seriously question whether there is a useful product or social contribution there.

Reply to
dapperdobbs

What bothers me are the multi-month artificial booms and busts in sectors. You may have a multi year fundamental story you are trying to sit on, yet you know you would do better to hop out then back in at times. I think once those levered cowboys decide a sectors trend is "broken", you really suffer by not bailing out along with them and getting a lower re-entry point later. I hate to have to watch that, and I hate to bleed by not following it (yes, I really can and do benefit by momentum trades). Seems the mini cycles get shorter and steeper, maybe for the reason Cramer indicates.

Reply to
dumbstruck

I hear everything you're saying, As well, short traders will try to panic long investors, shaking them out of perfectly sound positions. The function of capitalism is to raise capital in exchange for a share of the profits. The actual investment is in capital goods and employment to produce products and services to meet demand. It's a thin line to argue with free markets, but I very often resent the 800 pound gorillas. They got to be 800 pounds by people who buy funds, instead of individual companies. I asked some guy what stocks his funds owned - he had no idea. I checked two of the funds, and found that a third of the companies they held had no net earnings. It is possible to lighten up at chart and PE highs, and wait to buy back at chart and PE lows; also to open positions at lows.

Reply to
dapperdobbs

I fervently hope that, with expansion of the internet, more and more investors will adopt a do-it-yourself frame of mind and construct their own "mutual funds" so to speak. It doesn't take a high-paid "gorilla" or bunch of "gorillas" to invest in a good sensible diversification of individual stocks. The coming of dividend reinvestment plans (DRIPs) and access to more information about them has been a step in the right direction.

Reply to
Don

High volatility is a sign that the stock market is going to make a move.

It's a consequence of being part of a complex chaotic system. Earthquakes can be thought of as volatility as the earth shifts the plates around. (OK, analogies are silly, but I hope you get the idea.)

-- Ron

Reply to
Ron Peterson

The main def of chaotic is "completely unordered and unpredictable and confusing". So why does anyone try to, listen to, or subscribe to the gurus that "predict" the market? I studied and used Statistics and can follow a trend line, but anybody saying they can predict a chaotic system is full of it. Tossing darts at a jumbled pile of sticky notes w/ S&P 500 Stock names would serve as well.

Your 1st sentence contradicts your 2nd sentence. Either it is a chaotic system or it is predicable- can't have it both ways.

Chip

Reply to
Chip

Wikipedia gives a better definition with: Chaos theory is a field of study in mathematics, physics, economics and philosophy studying the behavior of dynamical systems that are highly sensitive to initial conditions. This sensitivity is popularly referred to as the butterfly effect. Small differences in initial conditions (such as those due to rounding errors in numerical computation) yield widely diverging outcomes for chaotic systems, rendering long-term prediction impossible in general.[1] This happens even though these systems are deterministic, meaning that their future behaviour is fully determined by their initial conditions, with no random elements involved.[2] In other words, the deterministic nature of these systems does not make them predictable.[3] This behavior is known as deterministic chaos, or simply chaos. Chaotic behavior can be observed in many natural systems, such as the weather.[4] Explanation of such behavior may be sought through analysis of a chaotic mathematical model, or through analytical techniques such as recurrence plots and Poincaré maps.

It's deterministic, but not predictable because it's very sensitive to the state of the system or outside disturbances.

-- Ron

Reply to
Ron Peterson

Dodge & Cox Stock Fund was so popular and respected a few years back that they closed it to new investors. I think they qualify as a gorilla. This is what they did:

As of their quarterly 12/31/2007 they reported 14.4% of their portfolio in "Financials" plus 3.5% in "Diversified Financials" (total of $5,232,662,508). That included 54 *million* shares of Wachovia, valued at $2,069,037,590. In their 6/30/2007 report they stated 16.9% plus 5.2% in the two financial categories, and that included

107,365,622 *million* shares of Wachovia valued at $1,667,388,110. As of 9/30/2008 they reported the same number of WB shares valued at $375,779,677. At that time, they also still held positions in Fannie Mae, HSBC, Capital One, and Citigroup. Sometime in the 2ndQ of 2008 they added 50.7+ million shares of AIG valued at $1,343,598,766 on 6/30/2008 - those shares were not reported 9/30/2008. DODGX dropped from 165 to below 60 in early 2009.

Yet individuals keep handing their money over to "professionals" to invest, contributing to market volatility which scares them.

Reply to
dapperdobbs

Ron,

I honestly do not understand why it is necessary or advisable to get into higher level mathematics for investment purposes, when one knows darn well that people are going to continue to go to Wal-Mart and buy McDonald's, and choose between Lowe's and Home Depot. Those companies are understandable, and one can go in and walk around inside their establishments, and talk to the people who work there, to see if they're content and helpful and think things are going well.

Dapperdobbs

Reply to
dapperdobbs

You sound like Peter Lynch (and that's a complement). One can do very well by observing companies they can walk into and judge for themselves. The issue of volatility and the higher math is more about the market as a whole, and while individual stocks are impacted, it's easier to ignore the ups and downs when the bigger trend is more obvious. That said, my individual stock purchases are a very small portion of he overall portfolio. I lack the time, patience, and intelligence to find more than a few good buys each year. Joe

Reply to
JoeTaxpayer

And 30 years ago, you knew darn well that people are going to continue to go to K-Mart, eat at Planet Hollywood, and choose between TWA and Eastern Airlines. (I may have the exact years wrong when each went under, but you get the idea.)

Higher math or common sense really doesn't work in the long run for choatic systems like the market.

Chip

Reply to
Chip

FWIW, K Mart is still in business. They have 4 stores active in the city where I live.

Closer to home, I bought a new Saturn in 2006, and all the dealers in this state are already gone.

Reply to
bo peep

FWIW,

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that K-Mart bought Sears.

-- Ron

Reply to
Ron Peterson

Unfortunately, hedge-fund investors and technical investors are using higher level mathematics to make their investing decisions which indirectly(or is it directly) affects the stock and bond markets that most of the self-directed investors participate in.

The theory of stock options does require some higher level mathematics to understand, but, in practice, most investors should be able to make money or reduce risk using stock options.

Many people don't understand the principles of accounting enough to make good investment decisions.

-- Ron

Reply to
Ron Peterson

Picky, picky, picky- all K-Marts are gone around me. As I am the center of my universe, that means they are gone everywhere. So how am I supposed to walk around their stores and ask the employees how they like the company?

BTW, how was that last trip on TWA?

Chip 1

Reply to
Chip

[snip]

Ron,

In light of that distinction between investing and gambling, I think you answered my question perfectly. As Dumbstruck and Joe Taxpayer state to varying degrees, it's annoying that gorillas gambling influence sound investment decisions, but then again, Ben Graham's Mr. Market is described as a peculiar fellow who is always ready to exchange with you regardless of his mood swings.

Accounting is now offered in high school, so I hope the on-coming generations will grasp it. Charts and graphs of sales and net earnings in annual reports, then adding management description of business and management analysis and comments is probably 75% of a thorough analysis. Sales of separate product lines and profit margins gets a little deeper, and some want to look closely at balance sheet categories, but as far as I can see, once a superior company is identified, the analysis switches over to macro-economic analysis. There are investors around, and they do control the markets in the longer run. DHI's (D.R. Horton) stock price turned down about 12 months before the housing market, so somebody was watching the numbers.

Reply to
dapperdobbs

...

It would be nice if we could do something to get funds with short-term objectives out of the market. I've hated hedgies for many years, since the 'currency crisis' of the early 1990's. But people who give money to them want returns, and apparently don't care how. I thought this was a spot-on topic for investors, and that comments about the applicability of higher math were helpful, since the funds are the only ones that use 'risk models,' and financial regulation is being written.

It seems to me that as early as 2005 it was not hard at all to sniff out a bubble in housing, at a common sense man on the street level. So would anyone like to guess, or does anyone have info, about whether a) the risk models did not see the bubble, b) the models saw the bubble, and 'hedgies' or whatever made it all worse by stacking up on the short side, c) the models saw it but the 'hedgies' ignored them or never understood the models in the first place, as some have suggested about bank CEO's, or d) the models saw it and were understood but 'hedgies' (banks) were too wrapped up to get out, or e) ?

Two people who know a lot about accounting and banking have commented "things are a mess." I really hope Congress gets regulation right to shut these 'hedgies' down forever (like maybe throwing them all into the machinery of their own risk models to be chipped into a trillion tiny pieces). I also hope individual investors come around to thinking of "Private Equity" as selecting their own stocks and managing their own portfolios.

Reply to
dapperdobbs

On 6/21/2010 2:17 PM, dapperdobbs wrote: I also hope individual investors come around to thinking

BUT, does that not still leave them open to market manipulation and higher math?

Chip

Reply to
Chip

They went bankrupt and the equity was wiped out. After the reorganization, what was left of it merged with Sears and K Mart bondholders received equity in Sears Holdings in exchange for their bonds.

FWIW. Equity can be wiped out but the business can keep on (appearing to) be ongoing.

Reply to
BreadWithSpam

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