Stock Market vs Statistics

Stock Market vs Statistics

When the stock market is falling, you’ll hear lots of stories about the reasons “why”.  You’ll also hear a lot people say things like this:

“This is an overreaction.  It is a buying opportunity.  The economy is fine.”

Understanding that all statistics are open to interpretation is SO important when it comes to investing.  And when it comes to statistics about the economy, investors must realize that there is a BIG difference between the economy and the stock market.

With the benefits of having such a large amount of easily accessible information at our fingertips, comes a big caveat.  No matter what someone’s bias is, they can always find plenty of statistics that support it.  When it comes to markets, the data is never black or white.  It is always open to interpretation.  As I pointed out a few weeks ago, people often interpret the same data in very different ways.

The stock market isn’t priced based on what the economy is doing right now.  It isn’t priced based on what you think the economy will do in the future or even what the majority of people think the economy will do in the future. The stock market doesn’t care what anybody thinks.

Do business fundamentals matter?  Of course.  Fundamentals tell you a lot about a company and many investors rely heavily on that information.  Just like economic statistics though, fundamentals are only one piece of the puzzle driving stock prices.

“If you do fundamental trading, one morning you feel like a genius, the next day you feel like an idiot.” –Jim Simons, Renaissance Technologies

Apple is possibly the greatest company on earth.  It has extremely strong fundamentals, incredible growth, great products and is a cash producing machine.  From November 2011 to September 2012 its stock price rose almost 100%.  The company was firing on all cylinders.  But then something changed.  From October 2012 to June 2013, Apple’s stock dropped 50%…all the way back to where it started.

What happened?  Did their growth story change?  Did they stop making great products?  Was the company in financial distress?  The answer to all of these questions is no.  The only thing that changed was sentiment surrounding the stock.  The story went something like this…

Apple’s stock dropped 10%:

“Don’t worry, this is just temporary.  Nothing is wrong with Apple.”

Apple’s stock dropped another 10%:

“Buy more stock.  Apple is going back up.  The company is doing fine.”

Another 10% lower:

“I’ve made a lot of money in this stock.  I don’t want to give back all my gains.  I’m taking whatever profit I have left.  This stock has been good to me.”

Another 10% lower, -40% in a few months:

“Maybe something is wrong that we don’t know about?  Apple might be ok, but I don’t want to risk it…I’m out.”

Another 10% lower, 50% of market cap wiped out:

“I love Apple but this is too painful.  I’ve lost a lot of money.  Apple is doing fine but the stock market is broken.  Sell.”

18 months later Apple was back at its all-time highs.  Nothing had changed.

And that’s how the stock market works.  When you see the market or a stock starting to fall, don’t be so quick to brush it off.  Don’t try to justify it or convince yourself it shouldn’t be happening.  Mark Twain famously said:

There are three kinds of lies: lies, damned lies, and statistics.

Don’t get fooled by the statistics.  The market will take your money no matter what they say…


Tim Brennan

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