Finding symmetries in an unsymmetrical world ..

Posts Tagged ‘Warren Buffett

Are Economic Facts Driving Stock Prices or Merely Rationalizations for Existing Price Moves? At the heart of it this symbolizes Casino Capitalism. A question like this is sure to engage a debate from the houses, the hard core finanancial-academic-research savvy giants, and the wall street-speculating stock traders.

The fact is that we are moving from rationalization to a point where we measure what we are paying for a commodity from just its supply and demand. Now what is inherently wrong with this is ,we are undervaluing the basics of what we already know, the simple equation ..



The supply and demand equation

The supply and demand equation






Unless there is an equilibrium that is reached between this, there is bound be a blind gamble that is open in the market, hence the casino..

What this also means is that, stock prices for legitimate companies, and prices of other paper assets, are more a function of psychological factors, than economic realities. In fact, in many instances, economic facts are used to justify a price rise (or fall), after the fact. So in reality, the economic rationalization is a reaction to the price change, rather than a cause. It is used to “defend” the price change, or “market” the story.

So between the economic considerations and the psychological factors (i.e. anticipation of the prices, and the general sentiment of the market), there is bound to be bias towards the latter, simple, because psychological factors can be imposed, or introduced artificially for short term gains, but what rules eventually is how strong is the organization that you are investing in, how is the management, and how does the customer perceive of it. Of course this perception part on the customer is different from what the naïve investor thinks about it, one who is just interested in making some quick money. This can also be termed as the noisy market hypothesis.

But alas, the pricing of this oraganisation, depends to a very large extent on this naïve, otherwise uneducated customer, because he controls how the balance is achived;for he decides the overall sentiment in the market, and the worst part, such investors tend to imitate other naïve investors, setting up a model where the overall sentiment is no indicator of the current valuation of a stock.

What you need to be sure is that you invest early enough when the stock is underappreciated or is undervalued for its potential. This is also the basics of the Warren Buffett investor principles, because the later you jump in the market in that particular stock, the more will you be part of the bull market, when the investor confidence is on a high note.

So what you can do is invest smart, early, and when the stock is still undervalued, and when it justifies every single hard earned penny that you are investing it in. Don’t blame someone for all your financial woes.

This also justifies that bailouts are not the answer to pull an economy out, neither is the blame game. You are responsible for what happens around you, even if you do not participate in it. And by just taking up this responsibility you have come from the “victim” to be someone who can emerge redefined, and start all over again. Go Do that! 



A simple word success story : DO 


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