Markets get prices right. That’s what they do. There is a market for every product and service that you purchase and they all work in the same way. Buyers seek low prices for obvious reasons. Sellers seek high prices for equally obvious reasons. It is the resolution of the tension between buyers and sellers that produces the proper fair-value price.
There is a strong penalty for a seller who demands too high a price; he is driven out of business because he cannot find buyers to purchases his goods or services, There is also a strong penalty for a buyer who refuse to pay the fair price; he is not able to obtain a good or service that would enrich his life.
The Markets Get Prices Right
Please take note of something here. We don’t speak of overpriced scrabble games or athletic socks or movie tickets. Those things could become overpriced for a short time. But if one movie theater gains a reputation for charging more for its tickets than the other movie theaters, word gets around and fewer people go to that theater. So the owner of that theater is forced to lower his price to the fair-value level.
No one has to write a citation demanding that this fellow get with the program. The market takes care of the problem without any nasty exchanges taking place. That’s the magic of markets. They get prices right in a quiet but highly effective way.
If only it worked that way in the stock market!
I want to see that happen. If I have my way, the same magic that already works in every market except the stock market will begin working in the stock market as well. What a wonderful, wonderful, wonderful world that would be!
Why doesn’t the stock market already work like every other market? What’s the problem?
You buy a gallon of milk. You place it in the refrigerator. You are now both a regular buyer of milk and an owner of a small amount of milk. Do you think of yourself as a seller or a buyer of milk? You think of yourself as a buyer. You theoretically could sell that gallon of milk to someone. But why would you? And in the unlikely event that you did, it wouldn’t change how you thought of your role in the milk purchasing market. You would still think of yourself as a buyer, just a buyer who on one occasion sold a gallon of milk because you happened to not need it and to know of someone who did.
We are all milk buyers (and scrabble game buyers and movie ticket buyers). We leave it to the companies that offer milk and scrabble games and movie tickets to worry about making sales of those products and services.
Which means that we root for low prices for those goods and services! Have you ever heard anyone complain that: “oh, the price of milk is just too darn low nowadays!” It doesn’t happen.
It doesn’t work that way with stocks. That’s why things are so messed up in the stock market.
You are mostly a buyer of stocks. If you are like lots of people, you have some sort of arrangement at work under which a small percentage of every paycheck is directed to the purchase of stocks that will help finance your retirement. Please stop for a moment and consider what the discussion just above suggests that that should mean re your views on whether high stock prices are a good thing or a bad thing. You are a buyer of stocks. You should applaud low stock prices, just like you applaud low milk prices.
You should. You don’t. But you should. If stock prices fell 50 percent tomorrow, you could buy twice as many stocks with your next paycheck as you will be able to buy if prices remain stable. Stocks possess value. Buy more of them and more of that value goes into your portfolio and permits you to retire earlier. Low stock prices are good.
Why is it that you think of low stock prices as bad and high stock prices as good? Why is it that, when you hear on the news that the DOW has increased by 10 percent over the past few months, you let out a cry of excitement rather than curse your bad luck to be living at such a time?
It’s because, while you are much more a buyer of stocks than a seller of them, you do expect someday to sell your stocks. You buy milk to consume it, not to sell it. You can’t consume stocks. Their only benefit to you is that someday you will be able to sell them at a higher price than the price you paid for them and the difference between the two numbers will help you to finance your retirement. So the stock market is an unusual market. It is a market in which the people who buy the goods being offered for sale think of themselves as sellers more than buyers.
Which means that they root for high prices!
Even though they are primarily buyers, which means that they should be rooting for low prices!
As a result, the stock market is all kinds of messed up. We need to learn how to think about what goes on it in a different way.
Rob’s bio is here.