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Top 5 Ways the Stock Market Is Like a Newborn

  • Craig VanHulzen Money Channel Editor
  • 2000 15 Sep
Top 5 Ways the Stock Market Is Like a Newborn
It requires constant attention, needs to be pampered, fed regularly, and changed to remain happy. It is capable of three general states of mind: happiness, indifference and discontent. Discontent can be brought about quickly when it does not receive immediate attention. Are we talking about a newborn or the stock market?

1) A newborn child can see only a very short distance -- the stock market is extremely short sighted.

2) A newborn child needs constant attention from an adult -- the stock market needs constant reassurance from companies.

3) A newborn child can become unhappy in a nano-second -- the stock market, well, we know that one.

4) A newborn child must be fed, burped and changed at regular intervals to remain happy -- the stock market requires quarterly feeding from companies in the form of earnings. To remain happy, both child and market must get what they expect. Too little food and too little in earnings can result in item 3 above.

5) A newborn child grows through regular nourishment, as does the stock price of companies that remember to feed the markets.

Indeed, the markets act like newborns in many ways.

The markets, of course, are made up of all us investors who place dollars in accounts with the intent to own company stocks, which we hope will go higher. Collectively, the group of investors around the world acts as a voting machine, an emotional mechanism that reacts instantaneously to news and causes markets to swing violently. The old market saying rings true, "Fear and greed rule the markets."

To avoid the herd mentality of emotional reaction to news reports, we must have a rational and reasonable strategy for investing our money. Peter Lynch, ex-manager of the world's largest mutual fund, is considered one of the best all-time money managers. He once said that he does not invest in a company that he cannot describe to a 7-year old using only a crayon.

He also used to sit outside retail stores in the mall and count customers that entered. And he also received good stock tips from his wife, watching what their family used in everyday life and how quickly a product was consumed.

Investing in the stock market comes down to common sense - yours, not the market's. If we approach our investment portfolios in a rational manner, we would hold IBM through some tough years (such as we had in the mid '90's) when the markets were convinced the company was washed up. 1,100 percent later, we would have made a sizable sum.

Other large companies with good products are experiencing "market doubt" right now. Could they be ripe for harvest? AT&T, MCI Worldcom, Nokia, Lucent Technologies, and Microsoft are a few of the world's largest companies which have fallen 30 percent to 50 percent from their recent highs.

For a values based perspective on companies, mutual funds and industry news go to My Investigator.