That is interesting. Quite a few of my favourite trading and economics quotes are word of mouth, and don't seem to exist online or in print anywhere.nisiprius wrote: ↑Mon Jun 27, 2022 10:41 amHe probably didn't say that.
He wrote, both in Security Analysis and in The Intelligent Investor that "The stock market is a voting machine rather than a weighing machine."
He didn't write "short term" and he didn't write that it is a weighing machine in the long term. He just says it isn't a weighing machine. Period.
Jason Zweig dug into this a while back, doesn't think "weighing machine in the long run" appears in any of his published writing, and couldn't find any evidence for except Warren Buffett remembering it that way.
In general, why do stocks go up/down so much/drastically?
Re: In general, why do stocks go up/down so much/drastically?
Re: In general, why do stocks go up/down so much/drastically?
Definitely many alternatives as commonly exist with complex topics infused with uncertainty, but not likely to be an either/or issue so much as a combination of factors that currently lie in the current context of being explained as "miracles," "mysteries of the universe," etc. Those comments are often little more than "I don't know but have a need to make a decision and act upon it." It be possibly be capsuled in the comment that no one knows anything with absolute certainty, but we all have many important decisions to make anyway.
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Re: In general, why do stocks go up/down so much/drastically?
This is less true with time. Over time, "the aggregate gains made by...shareholders must of necessity match the business gains of the company.”nisiprius wrote: ↑Mon Jun 27, 2022 11:22 am It seems clear enough that the stock market is a combination of a gambling element and a legitimate investment element. (By "legitimate investment element" I mean a mechanism to raise capital for enterprises with the credible ability to use that capital to make money).
- Bogle, John C.. The Little Book of Common Sense Investing. (quoting Warren Buffett).
In other words, the speculative, or "gambling" returns of the market become less important the longer one holds their investments. From 1900 to 2010, investment returns (dividend yields plus earnings growth) matched market returns (investment returns plus speculative returns) to within 0.5%.
Therefore it is misleading, or incomplete, to simply say there is a "gambling element" to the stock market, since this become increasingly irrelevant with time in the market.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
Re: In general, why do stocks go up/down so much/drastically?
Stocks are volatile because uncertainty exists.
All we know is the past and what is happening right now.
We can project possibilities and their various likelihoods into the future, but we can't know them as a certainty until they have happened.
People care if growth is slowing because they don't know (1) how long it will continue to slow and (2) how much it will slow, or (3) whether it will increase, (4) when it will increase, (5) how much it will increase and (6) how long it will increase, if it does.
If a stock (and it's usually a growth stock) has a very high P/E and the price of the stock continues to go up, then that means that people are willing to pay that price not for current earnings but for future earnings (sometimes far far future earnings). Future earnings (especially far far future earnings) are unknown and shrouded by uncertainty. When it seems slightly more certain that future earnings will be less than expected rather than as expected or more than expected, the price that people are willing to pay for those future earnings goes down.
If a company isn't earning as much as they were before, then their stock shares are not worth the price that people were willing to pay before, because you buy stock in order to take part in earnings. When earnings go down, you get less. If earnings go down for a long time or stay down for a long time, the stock becomes worth less than it was before (i.e. people are willing to pay less for it than they were before).
When you buy a share of stock, you are paying for earnings. You will see those earnings either in dividend payout or share price appreciation. Any additional share price appreciation not accounted for by actual earnings growth is due to future earnings growth expectations exceeding past earnings growth history.
A company doesn't have to be worthless for a stock to become worth less than it was before, and for a long time. Likewise, a stock can become worth more than it was before without a company having increased in actual value.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Re: In general, why do stocks go up/down so much/drastically?
Warren Buffet was a student of Graham and it is entirely possible that Graham said this during a lecture. You are free to dispute Mr. Buffet’s quotation, but I’m going with Buffet because Buffet is the one who had the personal interaction with Graham.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: In general, why do stocks go up/down so much/drastically?
Fear and Greed can flip very quickly.
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Re: In general, why do stocks go up/down so much/drastically?
I have often wondered what drives the large swings in market valuations.
The first question I had was, while we have daily volume information on trades, what percentage of the underlying market do they represent? Is 1% of the market in play? 5%? I have not been able to get a good grip on this. This is compounded by the fact that individual shares may be traded multiple times a day. How do you factor that in?
Secondly, how much of the activity is from the retail sector, either through trades in individual stocks or in funds/ETFs? How much is driven by institutional investors?
I don’t know if it is possible, but if anyone was able to put together an analysis of daily trades broken down by percentage of market, retail/institutional investors/ETFs & funds it might be interesting.
As it is, I just put it down to “manure happens.”
The first question I had was, while we have daily volume information on trades, what percentage of the underlying market do they represent? Is 1% of the market in play? 5%? I have not been able to get a good grip on this. This is compounded by the fact that individual shares may be traded multiple times a day. How do you factor that in?
Secondly, how much of the activity is from the retail sector, either through trades in individual stocks or in funds/ETFs? How much is driven by institutional investors?
I don’t know if it is possible, but if anyone was able to put together an analysis of daily trades broken down by percentage of market, retail/institutional investors/ETFs & funds it might be interesting.
As it is, I just put it down to “manure happens.”
"The quest is the quest."
Re: In general, why do stocks go up/down so much/drastically?
If you think stocks go up/down drastically, look at long bonds like EDV (Vanguard's Extended Duration Treasury ETF)
A much higher standard deviation than stocks, Vanguard lists it as a "5" on it's risk scale (whereas Total Stock Market is only a "4")
PV Link
A much higher standard deviation than stocks, Vanguard lists it as a "5" on it's risk scale (whereas Total Stock Market is only a "4")
PV Link
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: In general, why do stocks go up/down so much/drastically?
Stocks seem downright calm as far as volatility goes when you compare to cryptoassets. I'm amazed anyone can tolerate their volatility long term but people do.
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Re: In general, why do stocks go up/down so much/drastically?
The market price for gold has a higher standard deviation than stocks as well...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: In general, why do stocks go up/down so much/drastically?
There is a gambling element to the stock market. The whole Bogleheads' philosophy is to minimize this element as much as possible, by holding the total market and by holding for a long time. But the gambling element does not go away, no matter how long the holding period. Even Jeremy Siegel has said so:Charles Joseph wrote: ↑Tue Jun 28, 2022 9:11 pmThis is less true with time. Over time, "the aggregate gains made by...shareholders must of necessity match the business gains of the company.”nisiprius wrote: ↑Mon Jun 27, 2022 11:22 am It seems clear enough that the stock market is a combination of a gambling element and a legitimate investment element. (By "legitimate investment element" I mean a mechanism to raise capital for enterprises with the credible ability to use that capital to make money).
- Bogle, John C.. The Little Book of Common Sense Investing. (quoting Warren Buffett).
In other words, the speculative, or "gambling" returns of the market become less important the longer one holds their investments. From 1900 to 2010, investment returns (dividend yields plus earnings growth) matched market returns (investment returns plus speculative returns) to within 0.5%.
Therefore it is misleading, or incomplete, to simply say there is a "gambling element" to the stock market, since this become increasingly irrelevant with time in the market.
And Stambaugh and Pastor (2011) found thatLet me show you the graph that is in my book... Now, many of you who have gone to my presentations have probably seen that slide before. Now, one thing I should make very clear, I never said that that means stocks are safer in the long run. This is the standard deviation of average annual returns. We know the standard deviation of the average goes down when you have more periods. Even if it's random walk, it goes down. What I pointed out here is that the standard deviation for stocks goes down twice as much twice as fast as random walk theory would predict. In other words, they are relatively safer in the long run than random walk theory would predict. Doesn't mean they're safe. The whole point is that they are relatively safer.
stocks are substantially more volatile over long horizons from an investor's perspective.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: In general, why do stocks go up/down so much/drastically?
Misleading was absolutely the wrong word for me to use. Re-reading, it sounded like I was saying you were misleading. Not my intent. Long time lurker here who loves your posts.nisiprius wrote: ↑Fri Jul 01, 2022 8:08 amThere is a gambling element to the stock market. The whole Bogleheads' philosophy is to minimize this element as much as possible, by holding the total market and by holding for a long time. But the gambling element does not go away, no matter how long the holding period. Even Jeremy Siegel has said so:Charles Joseph wrote: ↑Tue Jun 28, 2022 9:11 pmThis is less true with time. Over time, "the aggregate gains made by...shareholders must of necessity match the business gains of the company.”nisiprius wrote: ↑Mon Jun 27, 2022 11:22 am It seems clear enough that the stock market is a combination of a gambling element and a legitimate investment element. (By "legitimate investment element" I mean a mechanism to raise capital for enterprises with the credible ability to use that capital to make money).
- Bogle, John C.. The Little Book of Common Sense Investing. (quoting Warren Buffett).
In other words, the speculative, or "gambling" returns of the market become less important the longer one holds their investments. From 1900 to 2010, investment returns (dividend yields plus earnings growth) matched market returns (investment returns plus speculative returns) to within 0.5%.
Therefore it is misleading, or incomplete, to simply say there is a "gambling element" to the stock market, since this become increasingly irrelevant with time in the market.And Stambaugh and Pastor (2011) found thatLet me show you the graph that is in my book... Now, many of you who have gone to my presentations have probably seen that slide before. Now, one thing I should make very clear, I never said that that means stocks are safer in the long run. This is the standard deviation of average annual returns. We know the standard deviation of the average goes down when you have more periods. Even if it's random walk, it goes down. What I pointed out here is that the standard deviation for stocks goes down twice as much twice as fast as random walk theory would predict. In other words, they are relatively safer in the long run than random walk theory would predict. Doesn't mean they're safe. The whole point is that they are relatively safer.stocks are substantially more volatile over long horizons from an investor's perspective.
And you seem to agree with my reference to John Bogle, so we're on the same page. Time minimizes the impact of speculative return (I'm okay with calling that the "gambling" element of the market), but never totally gets rid of it (Bogle said time gets us pretty close...to within 0.5% of the dividend/earnings growth return over time)...but never totally eliminates it.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: In general, why do stocks go up/down so much/drastically?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.