Save Mr. Market
Moustafa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Watching the Presidential debates made me reflect on the economy and the recent problems we have had in the last decade from the dot com bubble, to the collapses of the housing market, to the taxpayers bailing out banks and automakers. As talking heads from every major network point fingers at different political parties, groups and special interests we must wonder who or what is to blame for these epic financial melt downs. It would be to easy to point the finger at the big bad wolf that is WallStreet and to lay the blame on the insatiable lust for profits that have led bankers to create more and more arcane financial investments. The often quoted metaphor of Mr. Market being a manic depressive, sometimes flying high sometimes in the dumps is used to explain the market fluctuations. I feel this isn’t the whole story and it’s to easy to write off huge swings in the market as the emotional ups and downs of a metaphorical guy with psychological issues.
Who is Mr. Market
Mr. Market is the metaphorical agglomeration of all the stakeholders in the equity market. Basically, all the interested parties that can buy and sell shares in the market. SInce Mr. Market was first proposed more and more different entities have been included in this agglomeration. Like a city that expands with little planning, the end result is chaos. Today you have short sellers, options traders, super computers calculating fractional share price moves, mutual funds with billions of dollars at stake and arcane financial derivatives that few if anyone truly understand. All this is combined with the public knowledge that one should hold stocks as a good investment for long term wealth. Add the fact that the average person has little or no actual investment knowledge, education or training and give their investments to people with only slightly more knowledge to manage. This combination creates a truly twisted Mr. Market. It harkens back to the middle ages when literacy and knowledge were kept form the masses for fear they would usurp the ruling Kings and Queens. We have a Mr. market today who is riddled with cancer and has no idea what to do to treat it.
Knowledge and education
We teach Physics, Math, Science and the Arts in elementary school through university. Where is financial education? I have a degree in Business Administration and have done the majority of my investing education on my own through resources like the Motley Fool. We have generations of people with no concept of money management, investing or market basics. What is more important today? Learning mass and acceleration equations or how to manage and invest the money you will earn from any of your chosen fields. Education solves problems in many spheres, as knowledge frees people from previously held stigmas and stereotypes, investing is no different. Lets take Facebook (NASDAQ: FB) as an example. The stock was by far the most hyped IPO in recent memory. Everybody was talking about FB going public, every news channel had updates on the IPO and it was a company that transcended the investment community as everyone could relate to FB as most people use or have experienced it. What was lacking was any type of real research done by the public at large who invested in FB. This is proven by the lawsuits that were filed after the IPO did not live up to expectations. That is a complete disregard of the basis of investing, there are no guarantees good companies have slumps and bad companies soar for short periods. The idea that you could sue because a stock didn’t perform is ludicrous. This is just one of many examples of the dire need for financial education from the earliest schooling.
Saving the Market
It has always been easy to prey on sheep, and that is what the majority of the public has become. Investing sheep to the Wall street wolves, work for 30 years to have your pension contributions controlled by someone you have never met, don’t know and who could very well not have your best interests in mind. If we start educating people from a young age on investing basics they will be armed with the tools to assess investments quickly, and do some basic research to verify if they should or should not invest. Instead of listening to talking heads say one thing, then a month later the exact opposite, you could armed with these tools take a company like Apple (NASDAQ: AAPL) and see if it really is the fantastic investment it looks like. I love Apple and think it will easily hit $1000 a share in the next 2 to 3 years. If Apple were to dip to $500 tomorrow without announcing something catastrophic I would be selling my car to double my position. This example is extreme but is very common in the market. News is released and the people’s knee jerk reaction is to sell. A great company takes a dive and people can not tell if its a great company that poses an opportunity. Apple has had many adjustments now trading around $650 a share. At one point it soared past $700 then has pulled back. This constant action can be difficult to handle unless you have some knowledge of why you invested in the business and where you think it will go. Education will help regulate the markets wild swings as people would not be as inclined to a knee jerk reaction.
If we go back to John Law and his Mississippi Company very little has changed in the way we deal in the market. John law has the dubious distinction of creating his own bubble when in the 1710‘s his Mississippi company which was effectively valueless was traded in France and speculation caused the shares to soar. Eventually the bubble burst and he bankrupted the bank he had also founded in 1720. As we saw in the sub prime mortgage crisis speculation almost brought down the entire banking system, as it did in 1720. It’s crazy to think that we are making the same mistakes we did 300 years ago. It is time to finally move forward and realize the importance of financial education. If we want to have a healthy Mr. Market that benefits everyone and not the select few we need to make this happen.
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I own shares of Apple