This article was first published on May 2, 2014
Heraclitus, a Greek philosopher, once mentioned: “The only constant is change”. Even to this very day, that is a relevant reflection of market prices.
Bar a soothsayer with 20/20 foresight, foretelling the exact movement of the next day’s market price would lead to a “your-guess-is-as-good-as-mine” type of situation. This echoed J.P Morgan’s “It will fluctuate” quip when asked about what the market would do that day.
So why do market prices fluctuate?
There have been countless rationales ranging from theories of asset pricing models to expectations of interest rates. Additionally, people appeared to believe that the market as a “collective intelligence” was a mind above and apart from the individual market participants involved. These theories were also held under the premise that market prices reflected the true worth of the entity in question.
Delving into the issue of intrinsic value would open Pandora’s Box and this isn’t the focus of the article, thus let us come back to the issue of why market price fluctuates?
Stock prices fluctuate as a result of market forces. In the field of economics, one could simply attribute price fluctuations as the consequence of supply and demand.
But what supply and demand are we talking about here?
In John Burr William’s words, “The market can only be an expression of opinion, not a statement of fact. Today’s opinion will make today’s price; tomorrow’s opinion, tomorrow’s price”.
Hence market prices are simply determined by the supply and demand of opinions. Both wise and foolish men trade in the market but no one group by themselves will set the price and it would eventually boil down to the last owner. Therefore the marginal opinion would be the market price.This really placed the herd’s “collective intelligence” in question and Benjamin Graham’s timeless concept of “Mr Market” as an emotionally unstable entity in the spotlight.
At any instant, the bid and asked quotations essentially reflect the opinions of the most optimistic non-owner and the most pessimistic owner of the stock. The margin would fall between owners and non-owners and at this margin, mere opinion would determine the actual price.
To sum up, an appropriate view of fluctuating market prices simply equates to a change in marginal opinion. An investor should pay more attention to underlying fundamentals instead of attempting to make sense of market fluctuations. Benjamin Graham’s view of market fluctuations were as follows: “Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal”.
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Cheong Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Cheong Mun Hong doesn’t own shares in any companies mentioned above.