Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

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Agcentral
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Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by Agcentral » Tue Nov 06, 2018 9:20 pm

There is a skirmish/war somewhere out there or when a company’s impropriety actions surfaces (i.e. Enron) etc?

Seems to me this is an unwarranted knee jerk reaction as the market always recovers sooner or later.

Is it because there is a money motivator out there of one kind or another behind the dip in stock prices?

Who wins during these times?

Sorry, I have often wondered what is behind these substantial dips.

onourway
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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by onourway » Tue Nov 06, 2018 9:27 pm

The major thing I see is that the market dislikes uncertainty. Wars and major mega-corps unveiled as pyramid schemes create an uncertain environment.

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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by Valuethinker » Wed Nov 07, 2018 3:40 am

Agcentral wrote:
Tue Nov 06, 2018 9:20 pm
There is a skirmish/war somewhere out there or when a company’s impropriety actions surfaces (i.e. Enron) etc?
Enron did not in itself lead to a market collapse. It was part of the dot com meltdown but that had already started (in May of 2000).
Seems to me this is an unwarranted knee jerk reaction as the market always recovers sooner or later.
You mean as Japan has not recovered? "Always recovers sooner or later" does not spell out a time period. The Dow nearly hit 1000 in 1966, then it did hit 1000 in 1972, then it did not hit 1000 again until 1980. Adjusted for inflation the record was much worse than that.

It hit 380 in 1929 and reached that level again in 1954. Total return the picture is less bleak (some companies stopped paying dividends, but overall dividend yield was significant), especially given the deflation of the 1930s. But believe me, if your portfolio drops 75%, but actually it is only 65% in real terms due to negative inflation, you will feel like you lost 3/4 of your wealth.

https://en.wikipedia.org/wiki/Closing_m ... 80%931966)
Is it because there is a money motivator out there of one kind or another behind the dip in stock prices?

Who wins during these times?

Sorry, I have often wondered what is behind these substantial dips.
Remember that stock prices are set by the marginal buyer and seller - the last buyer and seller. The vast majority of holders of stocks stay as holders, riding the volatility. There are sentiment driven traders out there, and they will tend to jump in and out.

It's logical that Enron's failure would cause a market reaction. Enron had contracts with many other companies, both as market counterparties and as suppliers to or customers of. It wasn't clear how far the repercussions would spread.

Given the emphasis on momentum in this bull market, the likelihood is of violent reactions from time to time as momentum breaks and the momentum funds and investors shift their weightings. Remember Facebook dropping 20% on a lower revenue forecast?

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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by JoMoney » Wed Nov 07, 2018 4:10 am

If assets are destroyed, or it is discovered that that the businesses reported assets were fraudulent, or there is some expectation that it would be the case, why would it not be "real reasonable rationale" for the value of the stock representing ownership of those assets be re-priced appropriately?
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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by Valuethinker » Wed Nov 07, 2018 5:46 am

onourway wrote:
Tue Nov 06, 2018 9:27 pm
The major thing I see is that the market dislikes uncertainty. Wars and major mega-corps unveiled as pyramid schemes create an uncertain environment.
The late Barton Biggs of Morgan Stanley wrote a book about this. It turns out stock markets tend to predict, accurately, the eventual winners of wars or military campaigns.

From vague memories of the book the FTSE index of the time (London) bottomed in early August 1940 i.e. just as the Battle of Britain (which lasted 6 weeks in its first crucial phase) began. And I think the Dow bottomed a bit after Pearl Harbour, but around the time of the Battles of Coral Sea and the Battle of Midway (May 1942 - the turning point in the Pacific War when the Budo Kitai (the "Striking Force") of Japanese carriers was destroyed*).

Similarly I remember well that as soon as the bombing campaign commenced in Gulf War 1 in January 1991, the stock market started booming. Having spiked down when Saddam invaded Kuwait in August 1990.


* American newspapers would have covered the victory. 2 Japanese carriers were substantially crippled at Coral Sea (out of the war for 6 months+) and 4 were sunk at Midway-- leaving them with no fleet carriers. The Japanese War Cabinet was not however told of the scale of the IJN's losses. Of course, it was only a turning point in retrospect, at the time it probably did not feel like that.

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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by nisiprius » Wed Nov 07, 2018 6:42 am

There be three things which are too wonderful for me, yea, four which I know not: The way of an eagle in the air; the way of a serpent upon a rock; the way of a ship in the midst of the sea; and the way of a market in a crash.

I don't think there's any reasonable rationale as to why the stock market collapses when it does. It's like any number of other situations in which one sees growing instability. The situation for which the word "precarious" was invented. At that you have reached a point where the system has positive feedback, and a change with enough energy in it will grow exponentially. Children's tower-building games, like Jenga or "Don't Break the Ice" are examples. So are earthquakes--energy is building up in the San Andreas fault and sooner or later there will be an earthquake, but nobody knows when and there's no "cause" explaining why an earthquake happened on 4/18/1906 rather than 4/17 or 4/19.

(And I don't believe the story about Mrs. O'Leary's cow causing the Chicago fire.)

Human situations involving crowd behavior are even less explainable. A common 1950s science fiction trope riffed on the kinetic gas theory: individuals are unpredictable, individuals in the mass might not be. I don't know if this was a personal idea of the influential editor John W. Campbell Jr. or whether it was because of the popularity of historian Arnold J. Toynbee. But it's faded. Fifty years later we don't have mathematical psychohistory.

At any rate, conflicting ideas in the minds of populations build up like tension in the San Andreas Fault, and then some little thing sets it off. Is there any reasonable rationale as to why World War I happened? Was the assassination of Archduke Ferdinand an "explanation?" I think the judgement of historians is that World War I was an accidental war, nobody wanted it, it was not rational in any sensible way. If forty million people can be killed with no rationale, then why can't $12 trillion be lost in a market crash with no rationale? The "war or skirmish" (what war or skirmish happened in 2008?) is just the straw that broke the camel's back.

At some point a crash really does become its own valid rationale, because it impairs the ability of businesses to function, reducing their rational value.

If anyone is suggesting that market crashes really are caused by shadowy cabals of high-ranking members of the Venerable & Virtuous Phalanstery of International Quarrymen, then, first, I really don't think that's true; second, even if it were true, believing it gets you exactly nowhere unless you personally are part of the inner circle and have your hands on the levers yourself.
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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by Valuethinker » Wed Nov 07, 2018 9:37 am

nisiprius wrote:
Wed Nov 07, 2018 6:42 am
There be three things which are too wonderful for me, yea, four which I know not: The way of an eagle in the air; the way of a serpent upon a rock; the way of a ship in the midst of the sea; and the way of a market in a crash.

I don't think there's any reasonable rationale as to why the stock market collapses when it does. It's like any number of other situations in which one sees growing instability. The situation for which the word "precarious" was invented. At that you have reached a point where the system has positive feedback, and a change with enough energy in it will grow exponentially. Children's tower-building games, like Jenga or "Don't Break the Ice" are examples. So are earthquakes--energy is building up in the San Andreas fault and sooner or later there will be an earthquake, but nobody knows when and there's no "cause" explaining why an earthquake happened on 4/18/1906 rather than 4/17 or 4/19.

(And I don't believe the story about Mrs. O'Leary's cow causing the Chicago fire.)
Don't know about the Chicago Fire, but in the case of the Great Fire of London (1666) there was a similar story and that may have been the source of the Chicago story.
Human situations involving crowd behavior are even less explainable. A common 1950s science fiction trope riffed on the kinetic gas theory: individuals are unpredictable, individuals in the mass might not be. I don't know if this was a personal idea of the influential editor John W. Campbell Jr. or whether it was because of the popularity of historian Arnold J. Toynbee. But it's faded. Fifty years later we don't have mathematical psychohistory.
What, in fact, brought Paul Krugman into the study of economics - in the Everyman Edition of the Foundation Trilogy by Isaac Asimov, he wrote the introduction.
At any rate, conflicting ideas in the minds of populations build up like tension in the San Andreas Fault, and then some little thing sets it off. Is there any reasonable rationale as to why World War I happened? Was the assassination of Archduke Ferdinand an "explanation?" I think the judgement of historians is that World War I was an accidental war, nobody wanted it, it was not rational in any sensible way. If forty million people can be killed with no rationale, then why can't $12 trillion be lost in a market crash with no rationale? The "war or skirmish" (what war or skirmish happened in 2008?) is just the straw that broke the camel's back.
I agree with your general point.

WRT WW1 I think (some) historians have swung the other way on that one. There was an inevitability about the collisions between various expansionist, imperialist and militarist forces in Europe in 1914. Kaiser Wilhelm's Germany was described by his Prime Minister as "an Army with a State, rather than the other way round" (paraphrasing).

It was like a gunpowder store in a hot dry spell. All that was needed was someone to light a match.

The system of Alliances then constructed for security before the war all but guaranteed that all the major powers would be pulled in. Except Great Britain, and the Foreign Minister, Lord Grey, had given undertakings to the French of which the rest of the Cabinet was unaware.

In any case, Great Britain was on the point of civil war (over Ireland) in the summer of 1914. Had WW1 not happened, there would have been armed insurrection in Ireland.

I am not sure where I sit on this - it seems that there would have been a widescale European war, any spark would have done. It was random chance which provided one.

The "accidental" part was how once the armies got moving, they could not be recalled. Again, though, that story with the Kaiser and his generals is a bit apocryphal. The actual line of argument apparently went "we can stop the mobilization and deployment, but it would cause chaos, and leave us vulnerable to our enemies, and we could not restart it". So it was "use it or lose it" which is different from "we can't do it".

At some point a crash really does become its own valid rationale, because it impairs the ability of businesses to function, reducing their rational value.
This is key. Our attribution of a "cause" is ex post - we search for causation. Was the dot com bubble busting really caused by the IPO of Lastminute.com? Or by the Barrons article re dot coms running out of cash in the paper that next week?

I don't think we know what caused the US housing crash (or the Bitcoin crash). At some point the market just realized that valuations were too high.

We can then construct a pretty good chain as to why the US housing crash proved to be uniquely damaging - as bad in its initial effects as 1872 or 1929. That part we can see cause & effect.

I believe the Canadian and Australian housing markets will crash. Afterwards we will attribute it to an interest rate rise by the Bank of Canada or something happening in China, etc.

But the reality is that houses are just too expensive, and there's too much debt, and there's a pyramid of bad lending practices and speculation that goes with that.

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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by basspond » Wed Nov 07, 2018 10:07 am

Algorithms.

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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by Phineas J. Whoopee » Wed Nov 07, 2018 5:52 pm

Valuethinker wrote:
Wed Nov 07, 2018 9:37 am
nisiprius wrote:
Wed Nov 07, 2018 6:42 am
...
(And I don't believe the story about Mrs. O'Leary's cow causing the Chicago fire.)
Don't know about the Chicago Fire, but in the case of the Great Fire of London (1666) there was a similar story and that may have been the source of the Chicago story.
...
There was a neighborhood rumor saying while Mrs. O'Leary was milking her cow that evening it knocked over her lantern, starting a fire in the hay which grew into the 1871 disaster. Certainly her barn was among the earliest buildings destroyed, but there's no evidence it was the very first. Her house survived.

The rumor gained wider notoriety a few days later when journalist Michael Ahern wrote it up and a newspaper published it.

Eventually the Board of Chicago Police and Fire Commissioners completed its investigation.
Thoughtco.com, summarizing the contemporaneous New York Times story, wrote: The commission concluded in its official report that Mrs. O'Leary had not been in the barn when the fire began. The report did not state a precise cause of the fire, but mentioned that a spark blown from a chimney of a nearby house on that windy night could have started the fire in the barn.
With Mrs. O'Leary absent from the barn there's no reason for a lit lantern to have been inside.

PJW

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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by WhiteMaxima » Wed Nov 07, 2018 7:05 pm

Profit taking. Wall street lure individual investor in, push up the price then dump it. as a BH, we really have to think of the intrinsic value of any asset and not fall into wall street scheme.

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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by CPO_investor » Wed Nov 07, 2018 7:19 pm

True market crashes are pretty rare - looking at historical returns, prolonged sell offs that could be considered more than corrections or just volatility don’t come around often. In 2008 there were a lot of factors - really a perfect storm that was 15 years in the making. Looking back, I remember there being an ominous feeling of fear about the economy and the markets ever since the dot com bubble leveled out. Enron, dot com bubble, 9/11, two wars, lackluster growth in the economy, housing bubble, sub prime mortgages, NAFTA fallout...people were almost expecting a crash. A self fulfilling prophesy if you will.

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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by arcticpineapplecorp. » Wed Nov 07, 2018 7:51 pm

Agcentral wrote:
Tue Nov 06, 2018 9:20 pm
Who wins during these times?
good questions. I didn't see this question answered specifically other than WhiteMaxima. That is one explanation (Wall Street is "smart money" and main street is "dumb money") but I don't think it's the only answer.

There's a difference between a company like Enron which goes to zero and other companies (too many to name) stock price that collapsed during 2008-2009 but eventually came roaring back over the next few years.

In the case of Enron or any company that goes out of business there are two winners:
1. early investors who bought in at low prices and sold out after the price increased, but before the company went bankrupt
2. short sellers who borrow shares and sell them when the price is high(er than they believe they should be) and buy them back after the stock collapses or the company goes bankrupt.

In the case of companies that lose value when the stock market collapses as a whole the people who "wins" are the one's who are buying more shares now that the price is stupidly low (below intrinsic value) and hold them until the future (selling at a profit above what they paid).

When 2008-2009 happened Warren Buffett penned an op-ed in the NY Times on 10/16/2098 titled, "Buy American. I am." (source: https://www.nytimes.com/2008/10/17/opin ... ffett.html) in part to calm the nerves of investors and encourage them to buy rather than sell shares of common stocks. He was explaining that history shows that those who buy when others are losing their heads tend to do better in the long run. Buying shares at lower prices tends to lead to higher future returns. He was putting his money (personal money, not berkshire money) where his mouth was.

Funny I had not read the op-ed before and read it after I wrote that last line about "putting his money where his mouth was". weird. Anyway, lots of nuggetts in that op-ed. I suggest you read it.

As for why the market collapses, you'd have to ask the millions of individual investors who are selling, why exactly they're willing to sell their shares at lower prices to those of us who will happily buy them up at those lower prices. The market is made up of millions of investors and the decisions are individually made, but herd mentality does tend to set in when there's a panic. You've seen what happens to a herd when there's a panic right? Good reason to not join a herd when a panic happens.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by hotpancakes » Wed Nov 07, 2018 7:56 pm

Perhaps not a rationale for a "collapse," but even though I'm bullish on index-based investing as I see no alternative, one of my fears is that growth in private markets will take the gains that are thought to be reserved for public markets, leading to a potential disappointment in long-term gains for us Bogleheads. The amount of money available to private companies today is bananas, and private investors are hoovering up all the gains for themselves in at least one industry (i.e. tech) before the public markets get their chance at an IPO. When returns begin to flatten, (partly because of democratized, asymptotically-zero-fee access to markets), what's keeping smart money (institutional, UHNWI, family offices) with infinitely deep pockets from going upstream and taking gains for themselves?

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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by Wakefield1 » Wed Nov 07, 2018 8:10 pm

arcticpineapplecorp. wrote:
Wed Nov 07, 2018 7:51 pm
Agcentral wrote:
Tue Nov 06, 2018 9:20 pm
Who wins during these times?
good questions. I didn't see this question answered specifically other than WhiteMaxima. That is one explanation (Wall Street is "smart money" and main street is "dumb money") but I don't think it's the only answer.

There's a difference between a company like Enron which goes to zero and other companies (too many to name) stock price that collapsed during 2008-2009 but eventually came roaring back over the next few years.

In the case of Enron or any company that goes out of business there are two winners:
1. early investors who bought in at low prices and sold out after the price increased, but before the company went bankrupt
2. short sellers who borrow shares and sell them when the price is high(er than they believe they should be) and buy them back after the stock collapses or the company goes bankrupt.

In the case of companies that lose value when the stock market collapses as a whole the people who "wins" are the one's who are buying more shares now that the price is stupidly low (below intrinsic value) and hold them until the future (selling at a profit above what they paid).

When 2008-2009 happened Warren Buffett penned an op-ed in the NY Times on 10/16/2098 titled, "Buy American. I am." (source: https://www.nytimes.com/2008/10/17/opin ... ffett.html) in part to calm the nerves of investors and encourage them to buy rather than sell shares of common stocks. He was explaining that history shows that those who buy when others are losing their heads tend to do better in the long run. Buying shares at lower prices tends to lead to higher future returns. He was putting his money (personal money, not berkshire money) where his mouth was.

Funny I had not read the op-ed before and read it after I wrote that last line about "putting his money where his mouth was". weird. Anyway, lots of nuggetts in that op-ed. I suggest you read it.

As for why the market collapses, you'd have to ask the millions of individual investors who are selling, why exactly they're willing to sell their shares at lower prices to those of us who will happily buy them up at those lower prices. The market is made up of millions of investors and the decisions are individually made, but herd mentality does tend to set in when there's a panic. You've seen what happens to a herd when there's a panic right? Good reason to not join a herd when a panic happens.
I suspect the selling (in the last "crash" that sort of rolled back today) started with big money managers such as operate actively run mutual funds or pension funds,then when the news flashes "Big Dow Drop" the millions of small investors start to get into the action like a flock of pigeons swarming in a roiling cloud. So now are the stocks in different hands than they were before? Or did the same people who sold buy them back (at higher prices!)?

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Re: Is there any real reasonable rationale as to why the Stock Market “Collapses? when…

Post by arcticpineapplecorp. » Wed Nov 07, 2018 9:04 pm

Wakefield1 wrote:
Wed Nov 07, 2018 8:10 pm
I suspect the selling (in the last "crash" that sort of rolled back today) started with big money managers such as operate actively run mutual funds or pension funds,then when the news flashes "Big Dow Drop" the millions of small investors start to get into the action like a flock of pigeons swarming in a roiling cloud. So now are the stocks in different hands than they were before? Or did the same people who sold buy them back (at higher prices!)?
I don't know the answer to that. What I do know is when the market has gone down it's because people are selling their shares to others who are offering to buy them at discounted prices. Whether that's active fund managers or just mom and pop doesn't really make a difference. Where do you think the money comes from for active managers to do their buying and selling? From mom and pop investors. So stocks are merely switching hands, from one person who believes the price will keep falling (the sky is falling) to others who believe prices will recover eventually and likely go higher still.

The opposite is also true when prices rise. Some (seniors for instance) are selling their shares (to get cash to live on) to us whippersnappers who sometimes buy shares at higher prices because we see the future is brighter still.

The best buys of course are the shares you buy cheap and sell dear.

Those who panic and sell have bought them dear and sold them cheap.

Know which you want to be and don't worry about what others are doing. Can't tell you how many people don't know what they're doing when it comes to investing. Fortunately for them, there's always bogleheads.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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