A Bourse Diary

Thoughts on stocks, speculation and ... life

Monday, November 21, 2005

A Mechanical Bull Market?

It is a common theory and view (also, so far I correctly remember, shared by Nobel Prize laureates) that the capital markets are "perfect", "efficient", so that they form a "perfect" price on basis of all information available in each single moment in time. One says, the market "discounts" all existing information efficiently, therefore it is actually not possible to outperform the average...

I believe, the truth is just the opposite: the markets are always wrong, the current price is never, where it should be - either is it too low or too high... This is by the way one of the views of George Sorros, on which he develops his investment philosophy.

About, say, 90% of the public do not know at all, where the price is to stand, can not discount information at all, and mostly do not even know what "discounting" means. In that point I like the technical analysts: they admit openly that they do not "discount" at all, do not bother about evaluation, "fair" prices etc.. They observe a chart and that's it. I regard this as nonsense, but at least they are honest...

In this sense: I believe that there is a certain mechanism, which presses the prices upward at the stock exchange. 90% of the public bets on long, on rising stocks. Of them about 90% do not know at all whether the current price is fair or not. Since however no one sells so gladly with losses, most hold their positions into the profit zone (at least). From this massive buying and holding in attitude a mechanical pressure develops upward.

Here it must be underlined very clearly that the upward tendency at the stock exchange is also on a long-term basis fundamentally supported and favors the long speculation.

Not knowing, where the correct price lies, the public buys and waits for higher quotations until something brings this "house of cards" to a fall. This happens rather at the extreme lows or tops of the market. Otherwise, if the situation is not extreme, the stock market wings itself up - one would like to say nearly mechanically. I believe, that bull market mechanism becomes slowly set in motion now.


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