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  • Writer's pictureDMattersdorff

The Stock Market as a Pain Machine

Updated: Apr 15, 2020

A colleague of mine in Boston once described the stock market, colorfully, yet accurately, as a "shit-seeking missile".  By that, he meant that the market always moves in the direction which, at the margins, creates the most pain for the largest number of people.

Most of the time, that direction is up.  At the margins, new cash builds up continuously as the economy expands, and savers and investors need to place it somewhere.  They invest money in their homes and businesses, but some portion of it goes into stocks, placing steady, continuous upward pressure on prices.  This is entirely normal.  The buying pressure and the increase in stock prices coincide with economic growth, with more profits and better prospects for many companies that have stocks to buy.  Everything makes sense.  All's right with the world.

Sometimes, the buying develops a momentum of its own which pushes prices above reasonable values.  At that point, buyers may pause to think.  Has a bubble developed?  The pace and urgency of their buying subside.  Everyone who intends to buy at that moment has probably already done so.  An eerie quiet prevails in the marketplace (or prevailed, before electronic trading).

In those moments, the market direction which causes the most pain to the largest number of people becomes down.  The market may drift down gradually from a lack of urgency on the part of buyers.  Toss in some bad news, however, such as a surprise viral pandemic which closes global business, and you have an opportunity to sow panic and create a lot of pain.  The stock market goes for this greedily.  It crashes, causing more pain yet until it reaches a price level where it can no longer generate more agonized selling from fearful shareholders.

Then, another eerie quiet descends, if briefly.  No more sellers, eh?  A lot of cash has built up on the sidelines?  Time to think about going up again.  And this cycle repeats.  The market continuously bounces up and down, almost experimentally, looking for anxious buyers or sellers to flush out and push into making big mistakes.

I love this metaphor and can remember what I was doing in 1989 when I first heard it.  In real life, the stock market does not have a mind or a strategy of its own.  It consists of nothing more than individuals, buying and selling.  They come together for the briefest of interactions, without conversation, and depart again.  But the metaphor accurately describes the net result - the stock market acts as a pain machine - and it suggests solutions to avoid becoming a victim.

First, and most obviously, in my opinion; don't hang out at the margins.  Your commitment to investing in the stock market has got to be strong, so strong that market panics of the type which we have just experienced do not affect you at all.  There are many reasons to invest in stocks with great confidence.  I won't drone on about them again here.  In my lifetime, so far, the stock market has gone up 33 times, before dividends, and we have no reason to doubt that it will do so again over the next 58 years.  That would bring the Dow, currently at 23,000, up to 759,000.

You can't realistically do better than that.  But to invest at all, you need psychic strength, a level of commitment to your investments and patience with periodic crashes, which insulates you from all of the temporary turmoil and pain in which the stock market specializes.   You have to be an optimist about the future, which is why I harp on that subject frequently.  With historical hindsight, the crash of 2020 will look like a great bargain, but only for those who had the strength of purpose to see through the temporary pain and hold on to their investments.

Secondly, it helps to cultivate extreme independence of thought and an almost willful disregard of experts and news reports.  My thinking about Coronavirus was partially influenced by something which I read about the Ebola crisis of 2014-2015.  At the height of that epidemic, the CDC suggested in a study that the virus might claim as many as 1.4 million victims.  The CDC presented this as a worst-case scenario, and attached a few caveats.  But the press picked up the number and reported it as a forecast, without all of the detail.  In the end, we had 30,000 or so cases of Ebola and 11,000 deaths.

COVID-19 is also a scary illness.  It spreads more easily than Ebola did.  But we've had 1.5 million cases so far around the world, a rounding error in a population of 7.8 billion, and 91,000 deaths.  Now, with hindsight, we can see that the markets greatly overreacted to the risk which the virus presents.  To avoid letting the press or the stock market scare you, you have to be willing to disregard 90% of what you hear and read as wrong or misinformed (except what you hear and read from me), and bear in mind that many institutions, not just the stock market or the press, have an embedded interest in scaring you into doing something which suits them - sometimes with good intentions, such as at the CDC, but not always.

I see the evolutionary benefits of sticking with the herd, and of attuning ourselves overwhelmingly to danger.  Think of a zebra on the African savannah, who wanders off without worry about or interest in the rest of the herd.  That zebra will not survive long enough to pass his genes down to the next generation.  Exactly the same selection process worked on early humans, giving us strong herd instincts.  In our modern world, however, especially with regard to investments, these traits work against us.  To free yourself from the pain which the stock market tries to impose on you, and to enjoy the many extraordinary benefits which the market conveys, you have to shake free from your ingrained biases.

In particular, you must remain an optimist.  Continue to see a light at the end of the tunnel.  It's the only approach which accords with fact.  And you must remain aware of how your thoughts are influenced by others, especially by experts and news reports, and to disregard those almost entirely.

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