Thoughts, ideas, suggestions and education from financial adviser Jim Ludwick, Founder of MainStreet Financial Planning, Inc. of Odenton, MD; Washington, DC; New York City, and Santa Barbara, CA

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Sunday, July 14, 2013

Ups and Downs

Why does the stock market go up and down every business day?

Answer: I don’t know.  I guess you can stop reading here unless you think we will have a surprise ending.

It’s a 24/7 world and the real stock markets never close.  When I was with Bank of America in the old days (before the purchase by Nations Bank of Charlotte, NC) we had stock trading centers around the world.  We were always ready to buy and sell in large quantities to make money and protect our clients if we could.  Notice making money for the bank came first.  It still does.

Professional traders make money by buying, selling, borrowing, loaning, leveraging and creating securities.  Some of these securities represent ownership of companies, but more and more securities these days seem to be created to take advantage of some situation where an artificial ownership of some element is devised to “hedge” or “leverage” some potential or actual situation in the markets.

Confused? Me too.

All I know is that these traders (small and large) make millions in what is characterized as “providing liquidity and efficiency” in the marketplaces.  Taking advantage of mispriced securities in one market over another market is just one example I understand.  Lawyers and Accountants help traders structure and execute transactions to take advantage of situations.  Everybody wins.  Or so they say.

For you and me, the individual investor, whether we’re active or passive, the deck is stacked against us.  We’re losers.  Hard to beat the big boys and girls.

First they play mind games with us.  They mislabel, misrepresent, and hype whatever is the popular fear or greed, but more often fear. They predict the future.  They tell us where these markets are headed next.  They tell us what new securities to buy to protect us from that event or make money from that event. They are usually wrong, but they get good press unless they are really wrong.  Think of Meredith Whitney’s now famous prediction of a muni bond meltdown in 2011. 

How do she get good press? Well, once in awhile they get it right and the press features them frequently thereafter.  Ms. Whitney was a good case in point since she is acknowledged to have predicted the 2008-9-credit crunch.   Think broken clock is right twice a day.   There are hundreds of stories like this one. 

So how we win this loser’s game with the deck stacked against us?  Is there an easy answer?  No.  But I’m a planner, not a money manager or a trader.  I’m also a reader.  Over the years I’m read some really good books and recommended several to help ordinary investors to understand what is going on and do as well as they can given the game we’re required to play.  We don’t make the rules.

If you’re interested in my reading list designed to educate clients, just send me an email.  I’d be happy to send you a copy.

Now for the big surprise ending that contains the answer to the question as told to me by Ken Fisher, Forbes columnist, money manager, and my former boss:  More sellers than buyers the market goes down.  More buyers than sellers, the market goes up.  “It’s all supply and demand.”  And now you know the answer.