Fact checking stock market wisdom

Claim: Stock market volatility has been crazy this month.

Our Ruling: True! This past month has been shockingly volatile. On average, there are 21 trading days in a month. Looking back on the previous 21 trading days ending 3/23/2020, we see an average daily move of 4.56%. There were more days with a 9% or greater movement (3) than days which moved less than 1% (2). The only time we saw more volatility in a month was in November of 1929. What we are seeing now is slightly more volatile than what we saw during the height of the financial crisis in 2008.

Takeaway: If the markets seem wild to you that is understandable and rational. Feeling uneasy because of this is normal.

 

Claim: Because volatility is so high, we will experience a market drop like we saw in 2008 or the Great Depression.

Our Ruling: False! While that claim is possible, believing it to be certain is wrong. No one knows where the stock market will be in a day, week, month, year or decade. The logic of high volatility could have been applied to the stock market in 1987, when in just 4 trading days, the market declined 28.5%. But selling stocks then would have been a mistake. Over the ensuing 10 years, the market did little besides rise, appreciating at an annualized 18.7%.

Takeaway: Timing the market is a zero-sum game, it’s not investing. Every trade has two people on either side of it. If you are selling, someone else is buying. If you sell now thinking you’ll get back in when the market calms down, you’re counting on someone wanting to sell out when the market calms down. You may find markets can rise as quickly as they fall. Investing means enduring the ups and downs and being compensated for it. And you are compensated for it! Even with this month’s move, stocks have returned 9.75% annualized over the last 94 years.

 

Claim: Some investors are irrational.

Our Ruling: True! We have noticed two funny examples in the last month of irrational behavior. The first involved a hot stock and the second an unfortunate trade.

Zoom Video Communications (ZM), the video conferencing company from San Jose, is up 134% this year as their remote conferencing services are growing rapidly. Zoom Technologies (ZOOM), a defunct company from Beijing that hasn’t filed a 10-K in six years, was up 1,890% on the year as of Friday, March 20^th. It has no reason to be up other than people confusing it with ZM.

State Street’s Mortgage-Backed Securities ETF, SPMB, had an interesting day on Thursday, March 12^th. The fund which holds AAA-rated debt guaranteed by Fannie Mae and Freddie Mac was trading close to flat before plunging 12% in the last half hour of trading. The next day, it rallied to close little changed from where it opened the day before. The reason was a single trader placed a market order, rather than a limit order to sell 500,000 shares or $13 million worth of the ETF. When volatility is high, markets can be thin, especially near the end of the day. The order blasted through the bid, costing the seller roughly $1,000,000.

Takeaway: The market isn’t perfect, and some investors are irrational at times. Be wary of trying this at home on your own!

 

Claim: I should try to profit off other people’s foolishness.

Our Ruling: False! While the capital markets aren’t perfect, it’s the best system there is. Anomalies happen, but they can’t be predicted or modeled, and they vanish quickly.

Trying to profit off the movement in ZOOM is a risky endeavor. You could have bought early hoping for a greater fool to come and pay more in the future. This is a dangerous game; after peaking on Friday, the stock dropped 60% yesterday. You might think you could buy put options or short the stock. Unfortunately, you’d find no options market exists on ZOOM, and good luck finding someone long ZOOM willing to lend you the shares so you can short it. What happened with ZOOM is entertaining but profiting off it isn’t practical and it’s not investing.

There was a quick 10% to be made with SPMB if you bought right at the close on March 12^th. To ensure you don’t miss the next opportunity you only need to create a system that monitors the 2,000 ETFs that trade in the United States, have several million in capital ready to put to work, and have the gumption to buy a plummeting ETF on a day the stock market is down 10% and bond liquidity is extremely low. In addition to all that you need another dummy to come along and place the foolish trade. Again, it’s not practical.

Takeaway: Profiting from irrational investor behavior is like betting on a game. In hindsight, it may seem obvious what was happening, but in the moment it’s challenging. You’re only going to make money if the person on the other side of the trade is losing money.

This is separate from investing where you give companies capital, the companies in turn provide goods and services, and wealth is created. You should expect a return from investing, but not from playing a game. At Rockbridge, we try to ensure you are investing.

 

That concludes this edition of Stock Market Fact Checker. Please reach out to Ethan directly if you have any claims you’d like a ruling on!