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March 21, 2007
Jim Cramer on Market Manipulation
I suspect many of you have seen this video because several people emailed me the link. If you invest money in the stock market and you haven't seen it yet, you MUST.
It is approximately ten minutes in length and it is the most candid conversation I have ever seen recorded about the manipulation of stock prices. I have heard these conversations over dinner but never in front of a microphone or video camera.
UPDATE (3/23/2007): YouTube has taken down the video but you can still view it on TheSteet.com. Thanks James for tracking that down.
Amateur investors want to believe that stock prices are a function of the fundamental value and future prospects of a company. They are not - at least not in the short run.
Amateur investors believe the news they read on the companies they own and think it means something. It does not.
Amateur investors desperately want to believe you can look at historical price, fundamentals and news and figure out which way a stock is going to go.
If this video doesn't fundamentally disabuse you of this notion, I don't know what will. And this is just talking about one tactic used by one group - hedge funds. There are many others, like window dressing and marking the close, all going on simultaneously.
Amateur investors, meaning people like you and me who do not run billions of dollars of institutional money, have only two choices. The first is to try to play the trading game against the pros. I am here to tell you it can't be done profitably over long periods of time - no matter how many seminars you take, newsletters you subscribe to, or pieces of software you buy.
The movement in prices is random. There is no ability to predict what is going to happen next. If you don't have the financial ability to move the price, you don't have a chance as a trader over the long run.
The other option is to take the VERY long view. You buy companies that you would be happy to own for many, many years because over the long run, the market machinations don't matter. While you own them you generate income from them, let them sit, whatever. If your investment premise is correct, and you are buying financially sound companies with good long-term prospects, the long time horizon cancels the noise and leaves you with nothing but signal.
The hard part, of course, is that while you own the stock, you have to train your brain to ignore the noise. It is easy to let our emotions take over and assign some meaning to the short term movements in price. But a reaction based on noise is, by definition, going to result in a poor decision.
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TAKEAWAYS:
1. The stock price does not reflect the fundamental value of a company in the short run.
2. News has no predictive value either.
3. Unless you have the ability to move markets, your only rational choice is to take a long-term approach to investing and ignore what happens in the short run.
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I would love to hear your thoughts on this topic. Specifically, what are your takeaways from it? Does this change your approach to investing in any way? Does it clear things up or muddy the waters? Leave your thoughts and comments below.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
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Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.
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