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The Roller Coaster

Let's get one things straight out of the gate. The stock market is in reality one big psycho-emotional auction. We will cover factors that move stock prices later on, but for now keep in mind that the price of a stock has a lot to do with the mood of the investors and the perceived value of the stock at a given point. Analysts and experts have devised many ways to arrive at what the fair value of a stock price should be. But the stock market's temper has always flown in the face of such arguments. The simple fact is that the stock market is a living breathing beast consisting of millions of investors and there is no predicting it.

You hear pundits making predictions about the market or your stock broker making a forecast based on some graph. Sometimes these statements become self-fulfilling prophecies. A well-respected analyst paints a dismal picture of the market's future because she had a fight with her husband the night before, and the market drops because of her comments. Was her prediction correct or did the market just react to her statement? Who knows? I always believe that each investor's instincts and common sense is good enough to make a calculated investment judgment given that the investor is comfortable with the basic concepts (which is why you are reading this). So give as much value to some pundit's statement as you would to your window cleaner's stock tip. And again keep in mind that stock prices are moved based on human emotion more than any other factor. Earnings, the economy, and forecasts are all factors because they change the investors' mood and their perception of the stocks. So as much as the prices of stocks move based on hard facts, they also move based on absurd factors such as rumors, greed, fear, and superstition.

It always amuses me to watch my children play with each other, and sometimes there are lessons to be learned in their games. Once I …