Is stock market like a rollercoaster?

By DAVID MOON, Moon Capital Management, LLC
Ocotber 10, 2010

Is the stock market a rollercoaster? Or is it more like a fat person trying in vain to lose weight? Either way, it is not rational, efficient or logical – at least not in the short term.

If it was, why would the Dow Jones Industrial Average drop 78 points one day, only to rise 194 points one day later?

A rollercoaster goes up and down, sometimes violently, but ends the ride at the same place it started. It doesn’t go anywhere. The Dow is sitting at about 11,000, the same place it was in September 2009, early 2006, late 2003, 2002 and 2001.

For nine years it has been a pretty cruel roller coaster ride.

For the past three months, however, it has been more like the dieting fat guy. Lots of vacillation, but a general trend upwards. Except in this case most of us enjoy the general upward trend.

An old mentor of mine used to pose the rhetorical question at times like these: is we is, or is we ain’t?

It is a question that confuses the media and supposed experts, even in simple matters like reporting on straightforward data.

On September 28, Standard and Poor’s released data through July 2010 for its S&P/Case-Shiller Home Price Indices. A September 29th Wall Street Journal article reported on the data. The first sentence of the article began “home prices rose for the fourth straight month in July.” The day before, a Financial Times article discussing the same data was accompanied with the headline “US home prices slip in July.”

No wonder the market is a rollercoaster. Or a failing dieter.

It is clearly not efficient and that has implications across our entire industry.

In the 1960s, some researchers at the University of Chicago hypothesized that the market was, in some form, efficient. They argued that when new information became available to investors it was relatively quickly reflected in the prices of all relevant securities.

This research is the basis for common current-day jargon such as beta and alpha. It is the rational for benchmarking and the goofy concept of tracking error.

It is the foundation for the entire pension consultant industry, where fat reports try to convince people that something called relative performance is more important than performance.

If you are retired, have you ever tried to spend a “relative dollar?” Kroger doesn’t take them. Relative dollars are fine when the stock market is increasing 10.5 percent a year and safe bonds return 7 percent.

All of this might make sense if the market was efficient. Might.

When you are about to throw up from the sickening Dow roller coaster ride, esoteric discussions about efficient markets and color coded charts with tiny style boxes are simply sophisticated ways to divert your attention from the fact that your money market fund returns about zero and the stock market remains 20 percent below its high of three years ago.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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