Matt Yglesias referred his readers to Chapter 12 of Keyenes' General Theory this a.m. and I checked it out after some morning hoops. It was as he said "staggeringly brilliant" especially his analysis of the American mindset and markets, both then and now. It's even more brilliant when you consider it was published in 1936. I don't know if it's selective memory or predisposition but I'm almost always amazed when I read the writing of philosophers, long gone, such as Keynes, Smith or De Toqueville and find their analysis insightful and prescient and most surprisingly relevant. Take this passage from Keynes General Theory:
A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really make much difference to the prospective yield; since there will be no strong roots of conviction to hold it steady. In abnormal times in particular, when the hypothesis of an indefinite continuance of the existing state of affairs is less plausible than usual even though there are no express grounds to anticipate a definite change, the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid basis exists for a reasonable calculation.
As a trader I can only second, third and fourth this motion. As investor for the past few years I thought investing was based solely on long term diligent financial and valuation analysis. In school you learn the keys to good market valuation rests with cash flow, balance sheet and income statement analysis. There are some more complicated techniques but they all derive from this. As a trader the last 8 months I've learned that markets move on nothing but NEWS, most time ignorantly or erroneously evaluated, as Keynes alludes to. Facts and rational analysis be darned.
A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really make much difference to the prospective yield; since there will be no strong roots of conviction to hold it steady. In abnormal times in particular, when the hypothesis of an indefinite continuance of the existing state of affairs is less plausible than usual even though there are no express grounds to anticipate a definite change, the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid basis exists for a reasonable calculation.
As a trader I can only second, third and fourth this motion. As investor for the past few years I thought investing was based solely on long term diligent financial and valuation analysis. In school you learn the keys to good market valuation rests with cash flow, balance sheet and income statement analysis. There are some more complicated techniques but they all derive from this. As a trader the last 8 months I've learned that markets move on nothing but NEWS, most time ignorantly or erroneously evaluated, as Keynes alludes to. Facts and rational analysis be darned.
The most pressing example is my trading of Apple. After I finished my love affair with the financials (thanks again Freddie!) I turned my gaze to stocks trading triple digits that I speculated would further decline on the ersatz "Obama hates markets" memes that conservatives spread. While every rational investor new anything Obama did would hardly affect Apple's balance sheet, cash positions or long term yield it literally oscillated between 112 and the low 80s 3 TIMES over a 5 month period. Based solely on NEWS, RUMOR and CONJECTURE none of which affected long term yields.
I guess Keynes main point is less economic and more behavoiral, in the sense that in the short term (which incidentally is at any one time an investors long term) emotions trumps rationality. If I like Apple but I see a bunch of orders coming in as sell, sell, sell and I watch it leak then pour to the downside I'm ghost, which in turn makes other people ghost and so on. The same thing happens, with less velocity to the upside regardless of how crappy a firms cash position or ROIC may be. While I've come to love the markets, Keyne's Chapter 12 has helped me understand that the markets, while falsely presented as esoteric and esteemed (mainly as a defensive barrier by those on the inside), are nothing more than a cheap parlour game of chance, manipulation and opportunity.
