My childhood was spent in Lincoln, Illinois, a small town right out of a Jimmy Stewart movie. On Saturdays, I would often ride my Schwinn Stingray down the brick streets, past homes with wide porches and lawns with giant oaks, to visit Thornton’s Toy Store on the town square. While there one day, I spied the board game ‘Stocks & Bonds’ and decided to buy it.
While I can’t say that I played this game all that often, a seed was planted. As a college freshman, I chose finance as my major. When I began work in the real world, I eventually left my accounting job for a ‘stockbroker’ job with Smith Barney, Harris Upham & Co. Today, having spent more than a few years in the business, this is what I know about stocks:
People like stocks for three reasons; (1) dividend income, (2) wealth accumulation, (3) psychic satisfaction … ‘bragging rights’ at the country club or bridge table. With regard to bragging, I recommend the humble approach, lest your Amazon turn into an Enron. Focus on (1) and (2) instead. Dividend income is obvious … who doesn’t like cold hard cash? As for wealth accumulation, that’s trickier. Dividend income is less variable. Stock prices can be very variable.
So, what determines the price of a stock? Answer … the market. A market consisting of human beings, and, to a large degree, computers with artificial intelligence. These participants analyze macroeconomic factors, central bank actions, corporate balance sheets and income statements, profit margins, price trends, valuations, insider buying and selling, market liquidity … all things that are mathematical and measurable … and all things that are constantly changing.
Additionally, there is one critical factor that is difficult to measure and predict; human psychology … beliefs and expectations. This is the aspect of the market that I have come to find most fascinating. Two excellent books on this subject are ‘Animal Spirits’ by Yale professor Robert Shiller, and ‘Thinking Fast and Slow’ by behavioral economist Daniel Kahneman.
Over the years, I have learned that, while math wins in the long run, psychology drives markets in the near-term. The key takeaways:
Thinking about all the above is the reason I come to work every day. I still enjoy the game I discovered long ago, and I don’t see that changing for quite some time.
Happy April 1st … don’t let anyone fool you!
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Any opinions are those of James Aldendifer and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected./p>
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