Last week we here in Virginia experienced the most severe earthquake in recorded history. And due to the hard underlying rock strata in this part of the country, this quake was felt from Georgia to the Hudson Bay. Most of us who experienced this shaker were impressed by its loudness; many thought it was a low-flying jet or a large lumbering truck moving through the neighborhood. Given the general lack of experience many in the region had with earthquakes, their responses were mixed and nearly comical. One family I know, not being sure what to do in the wake of quake, ran down to their basement and huddled in a remote corner, no doubt the worst thing to do. Many ran out of their buildings after the trembling had ceased – again something the earthquake experts tell us not to do. Luckily the damage was not widespread and in most cases modest. The stock market rose 3.4% that day.
On Friday of last week, a major hurricane threatened the eastern seaboard and caused what might be considered major panic (perhaps fueled by the media) among the population in the area. Early estimates suggested that Irene could cause as much as $10 billion in damage. New York City, for the first time ever, ordered a mandatory evacuation of low-lying areas of the city. There was concern that the New York Stock Exchange might not be able to open on Monday due to the high water and wind damage. On Friday, the stock market rose 1.5%.
As luck would have it, Irene did not prove to be as devastating as she might have been. Serious damage was widespread and flooding was a huge problem in many areas, but it was not quite as bad as people feared it might have been. On Monday, once the skies were clear and the wind calm, the stock market rose 2.8%.
For someone watching the daily gyrations of the stock market (and I hope the reader is not – you should be out doing fun summer things!), the last few trading days are a bit puzzling. The recent rally was clearly correlated with the earth quake and hurricane, but was it caused by these events? Most reasonable people would quickly conclude that a stock market rally should not be caused by earthquakes and hurricanes. I would agree, and I would also advise caution to anyone trying to make sense out of the tortured logic that may emerge from the commentary about these correlated events. Despite what one might hear from the “experts” who are supposed to know these things, I would submit that almost no one really has a truly solid understanding as to why the market moves how it does on any given day. Sure, many are asked to explain what did happen, and I think that their answers (most of the time) appear to be reasonable and might even be part of the reason, but can they really know the daily “why” of the market? I don’t think so.
This is why I focus on the longer-term and the individual company. We know that over time the stock market provides the best returns of any asset class. We also can understand much better the prospects and merits of one company as opposed to “the market.” We also know that the best time to buy stocks is when everyone else is selling. Did you hear about Warren Buffett’s latest purchase? He invested $5 billion in Bank of America (BAC) just at the moment when many thought the company was on the ropes. One might say, “Yeah, but he’s a billionaire, so he can afford to lose money if the investment goes bad.” Yet, anyone (regardless of net worth) could have stepped up that day and invested in BAC. Buffett did, not because he is a billionaire, but because he understands the concept of value and knows how to invest against consensus opinion.
Again, the Sage of Omaha has taught us all a great lesson. Would that we will listen and learn from it…