Why I Love the Stock Market

“The thing that most affects the market is everything.” – James Playsted Wood

While it’s never fun to lose money, the past couple of weeks reminded me once again why I love the stock market. Mr. Market is basically a crazy person that takes pride in frustrating people on a consistent basis. Every investor feels the market’s wrath at some point.

There’s always a chance that investors will get caught flat-footed. In 2013, anyone that was too negative got left behind in the relentless rise. This year the market slowly built up double-digit gains over nearly nine months, only to turn on a dime and give most of the gains back in a month.

The stock market is always somewhere on the continuum of panic, fear, complacency, greed or euphoria, but it’s tough to guess where and when the mood will shift from one to the other. This week it happened on a day-to-day basis.

Over the very long-term the stock market tracks the fundamentals — company earnings, dividends and the growth in the economy to some extent, but over the short-term it’s really just a huge experiment in human behavior and emotions.

If you take away the money-making or losing function of the market, it’s really a fascinating system. Sometimes I still wonder how it all works. It’s built on trust because no one really knows what this stuff is worth with any degree of accuracy. If they did, we wouldn’t have 5 billion shares trading hands back and forth every day on the NYSE.

Last week billionaire Carl Icahn said that Apple, one of the largest, most closely followed companies in the world, was undervalued by half. Sure, why not? A case could be made for or against Icahn’s claims and you could probably talk me into both with enough data and narrative.

The reason the market functions is because it’s a collection of different opinions that are always at odds with one another. And investors can never agree on anything. There’s a buyer for every seller, as they say. The market provides capital for corporations but also brings together a hugely diverse group of traders, individuals, institutions, speculators and even Mila Kunis to voice their opinions depending on their current investment stance.

And EVERYONE has an opinion (myself included). Now more than ever you can see those opinions in real-time on 24-hour financial news networks, finance websites, blogs, Twitter and other social media outlets like Stock Twits. During this minor four week pullback, I’ve heard hundreds of different takes on where we go from here. They all sound good, for the most part, but who knows what will happen over the next few months or even years?

Also, we never really know the real reason for the movements in the market. There are 2-3 legitimate-sounding reasons every day that are thrown around to explain the market’s move one way or the other, but they seem to change constantly. One day those 2-3 things “matter” to investors but the next day it’s a completely different set of reasons and no one has any recollection of what happened the day before.

The psychology of the market’s participants is by far the most important aspect for investors to understand. Yet the economy, the markets, and businesses involved are constantly evolving. Plus, there’s the fact that investors themselves are always changing with divergent objectives, motives, incentives and strategies.

That means that the market will always and forever be interesting, which is why I love it.