How to be a Successful Investor in an Immutable Marketplace

As the Labor Day holiday ended, so did the stock market’s holiday from underlying economic trends. Last week, the stock market was all about “better than expected.” On the first day this new week, however, the market was all about “worse than hoped.”

Last week, for example, the stock market celebrated a loss of 54,000 jobs in August because the private sector added 67,000 jobs. Interpretation: the private sector is recovering. Earlier in the week, some “better than expected” reports on manufacturing and consumer sentiment inspired investors to add a few hundred points to the Dow Jones Industrial Average.

But the reality, of course, is that nothing really changed last week. The US economy is still weak and the stock market is still as ignorant about the future of the economy as a loaf of bread. Truth be told, the loaf of bread might have the upper hand in this contest.

The stock market is often the last one in the crowd to figure out what’s really going on. And if the stock market is clueless, how much less we individual investors?

We are like Amish farmers at an adult film convention. We recognize most of the images before or eyes, but do not completely comprehend the context of these images. Back on the farm, the farriers and buggy whip-makers work with horses – exclusively – and these guys would never remove their overalls while wandering around the stables.

Over a span of months or years, the stock market exhibits a large measure of reason: good stocks tend to do well and bad stocks tend to de-list. But over short-term timeframes, there is little rhyme or reason to the share price trends.

Yesterday, for example, the major financial news services declared that “stocks closed lower following new worries about Europe’s debt problems.” Maybe yes; maybe no. This story of severe capital deficiencies in the European banking system is an old one, even if investors managed to ignore it for a while. Back in March, investors seemed to care about it. Then they forgot about it…until yesterday.

Likewise, two weeks ago, investors were distressed that the US economy was stumbling. A few days later, most investors seemed to believe that the US economy wasn’t so bad after all.

At least that’s what the news networks told us.

But the truth of the matter is embarrassingly basic. The market did not “respond” to good news; it simply bounced…and probably for no good reason. The Market does what the Market does, whether it makes perfect sense…or perfect nonsense. End of story.

We investors possess no power to impose our sense of reason on the financial markets. The Markets will do whatever they will do.

Likewise, we humans possess no power to impose our sense of reason on the Lord above. He does what He will do. Yesterday, He took back to himself one of his own – a beautiful, wonderful friend, colleague, mother and wife. He took back to himself a young lady named Fanny Gerbet who had managed Agora’s French office for the last several years. Her passing, at the age of 35, while leaving behind two very young children and a loving husband, seems the extreme of injustice. Maybe it is; or maybe God has better things in mind.

We hope for the latter. But whatever we may hope or believe, one thing is certain. We don’t make the rules.

Successful investors learn this essential lesson early on. That’s what makes them successful. They respond to the realities of the market place, rather than lamenting them.

Moving from the realms of finance and theology to the realm of legislation, we individuals also face an increasingly daunting burden of impotence. The laws change and there is nothing we can do about it. We can cast a vote, yes. But after that vote is cast, we usually find ourselves with a heavier burden than the day before.

Eric Fry
for The Daily Reckoning