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I’ve always been vaguely reassured by the idea that the stock market is run by very serious people with very serious computers, all doing very serious maths so that prices reflect reality. It seems like a reasonable arrangement. Sometimes I think I’m giving the whole operation considerably more credit than it deserves.
I was watching the news a while back when a story came on about a market “flash crash,” billions wiped out in minutes, recovered almost as fast, everyone moving on as if nothing had happened. My first thought was: how? My second thought was: if this is the smartest money in the world, what are the rest of us supposed to do?
The more I looked into it, the more it all started to look like a very expensive panic room.
Take April 2013. Someone hacked the Associated Press Twitter account and posted a single tweet claiming there’d been explosions at the White House and the President was injured. In the 120 seconds before anyone checked whether it was true, the S&P 500 shed $136 billion in value. Not because the economy changed. Not because a single factory closed or a single order was cancelled. Because of 140 unverified characters.
When it turned out to be false, the market climbed back up and quietly pretended the whole thing hadn’t happened. Like a man who’s just walked into a glass door and is hoping no one noticed.
Then there’s the Elon Musk episode of 2020, which is my personal favourite. He tweeted, apparently of his own free will, that he thought Tesla’s stock was too high. His own company. $14 billion in market cap vanished within the hour.
Now, I’m no economist, but I’m fairly confident that a CEO’s midday opinion about a vibe doesn’t change the value of a Gigafactory. The batteries didn’t get worse. The patents didn’t expire. One man typed a thought into his phone and fourteen billion dollars went up in smoke. The market, it would seem, isn’t really trading companies at all. It’s trading permission, and that permission can apparently be revoked by a tweet.
My favourite though, for sheer comedy of errors, is the 2022 Citigroup incident. A trader made a typo. That’s it. The brilliant, lightning-fast, supposedly infallible algorithms looked at the falling prices, assumed the other algorithms must know something they didn’t, and started selling to get ahead of a disaster that existed only in a feedback loop of their own making. €300 billion erased across European markets because one person hit the wrong key and the machines collectively lost the plot.
It’s the financial equivalent of one person running in a crowded shopping centre. Within seconds everyone’s sprinting, and nobody knows what they’re running from.
What I’ve come to think is that the market isn’t really a machine at all. It’s a crowd. And crowds, as anyone who’s been in a packed car park on Christmas Eve will tell you, are not at their best under pressure. The whole system has traded wisdom for speed, and in the race to be first it frequently sacrifices being right.
The reassuring part, if you can call it that, is that these moments of collective madness are usually temporary. The ghost vanishes, the tweet gets deleted, someone realises the typo was just a typo, and the whole thing carries on as normal. The less reassuring part is that it will absolutely happen again.
My advice, for what it’s worth: don’t check your portfolio on a day when Elon Musk is in a philosophical mood. And don’t confuse the speed of markets with the wisdom of them. They are very fast. They are not always very smart.
As for me, I’ve taken to watching it all with the same weary affection I have for the weather forecast. Useful as a rough guide, occasionally accurate, and absolutely not something to bet the house on.
Some think of the market as being comprised of a mob, or a bunch of lemmings, or gerbils on a wheel. Perhaps all of the above.
I think it is basically a group motivated by greed. Algorithms attempt to make frequent trades with gains of as little as a few cents a trade. This can result in occasional whiplash events. Even those trading on 12-month simple moving averages occasionally experience such situations. Note: in March the S&P 500 closed 0.4% above its 12-month SMA. This implies that one should be invested.
I personally think that “trading on the news” is harmful to the portfolios of most long-term investors.
Disclaimer: I generally don’t trade based on SMA’s. This was so in 2022. I’m a long-term investor and retired. This means that in recent years I have only purchased stock. I have a “cash cushion” from which to draw for meeting RMD requirements.
One of my favorite comments about what drives the financial markets came from the movie Trading Places “The good part, William, is that, no matter whether our clients make money or lose money, Duke & Duke get the commissions.”
I am still a fan of low expense broad based index funds be them mutual or EFT variety and my holding period will hopefully be a problem for my heirs. I only wish I had learned my preference sooner.
I enjoyed reading your post Mark.
William, glad you enjoyed the post, I know the exact line you mean, love that film. The two principals really ham it up like pantomime villains; I bet they had a great time filming those scenes.
Checking social media or the weather frequently is the gateway drug to frequently checking stock prices 🙂
I don’t have any social media accounts, so I’m saved from that particular rabbit hole, though I do check the weather regularly. The trouble is, I can look at the forecast and twenty minutes later have absolutely no recollection of what it said. Goldfish weather brain. 🤷
LOL, good one, Mark
I am not the brightest crayon in the box, so it was kind of funny when some of my tax people would call me in a panic whenever these silly occurrences caused a temporary disruption in the market.
Perhaps naively, I would try to explain that things not having a direct impact on a company’s earnings probably won’t have a long term effect on its stock price.
If I were still in business I’d probably just print your post and give them a copy.
If you ever do want to send someone the article, I could always add a little panic/don’t panic flowchart at the bottom! 😉
Thanks Mark. There is the old saying that “nobody knows nothing about the market” which can be very true. Years ago while managing a large IT organization, I started dabbling in stocks, especially tech stocks. I had some success but one day one of my stocks dropped 25% without any explanation. I could not find any news about it even though this was a major tech company. 23 of 24 analysts following the stock rated it a buy.
Finally, I asked my network manager if he had any idea about the drop. He said well it might be because one of the major products of this company enables PCs to attach to a local area network, and Intel has just put that function on their PC chip, eliminating the need for the company’s product. I asked him how long he had known that and he said “about a month”.
Common sense says this would be a major financial hit to this company, but 23 stock analysts were asleep at the switch. I wonder how often this occurs in the markets.
Jerry, that story is brilliant — 23 analysts all rating it a buy, and the most useful insight in the room came from a network manager who just knew. Because of course he did; he worked with the technology every day. A classic illustration of why knowledge is everything in stock picking, and since I know next to nothing, it’s exactly why I stick to index funds.
Hey Mark, Wall Street is not much more than LasVegas East.
I think Las Vegas has a better handle on the bottom line than Wall Street. The only flash crash you’ll hear about there is an empty wallet hitting the floor.
Two points Mark:
1) just reference the past few trading days on Wall Street
2) Why is it necessary to check the weather report living in Ireland? You know there’s only two options, cloudy, or cloudy with rain.
Oh David, you haven’t the faintest clue. I need specifics. Is it intermittent? Soft? Falling straight down like a decent, well-behaved rain? Or is it coming at you sideways, personally, as though it has a grievance?
Rain has character, you see. Texture. Intention. And we Irish understand this better than most. We have as many names for rain as the Inuit have for snow, which is really saying something given that snow has the good grace to eventually stop.
My personal least favourite, rendered faithfully in the local vernacular, is what we call “pishing stair rods.” A phenomenon less like weather and more like a structural failure in the sky. On those particular occasions, I find the only reasonable response is to draw the curtains, declare the day a write-off, and have myself a very principled snooze.