The article in the url link below focuses on the role of stock market traders in the recent stock market correction (Figure 1.4: The Shareholder Shift—From Investor to Speculator, p14):
“… the losses in United States markets alone are on the order of about $2.5 trillion in recent weeks. How can a loss of roughly $100 billion on subprime -- with some recoveries sure to come as property is seized and sold -- translate into a stock-market loss 25 times that size? … traders are sending stocks down by a fantastically larger amount than is warranted by a recession or the losses in subprime.”
I think the argument is overblown because it ignores an important driver of the recent stock market correction—accounting for past excesses prior to the sub-prime crisis. It also assumes highly rational behavior by traders who, the article claims, move the market at whim:
“The traders move the market any way they want, any way they think they can make money, and then they whisper a reason to journalists later in the day. Then the journalists print it or say it on television, and the amateurs believe it.”
Nevertheless, the article makes an important point regarding the perverse drivers of stock market trading—a focus on maximizing profit (via speculating) instead of an attempt to accurately price future cash flows (via investing):
“[Traders] don't act on the basis of what seems to them the real economic situation, but on what's in it for them. … I know this because I know traders. They've told me that they love to sell into fear because fear is bottomless -- you can make money selling all day, while buying eventually slows because enthusiasm has limits. The amount of money available to large professional traders is so large that they can overwhelm the market, at least for a while, anytime they want. And they like to do it when the market least expects it.”
Take care
Dave
Bill Werther & David Chandler
Strategic Corporate Social Responsibility
© Sage Publications, 2006
http://www.sagepub.com/Werther
Can Their Wish Be the Market's Command?
By BEN STEIN
1262 words
27 January 2008
The New York Times
Late Edition - Final
7
http://www.nytimes.com/2008/01/27/business/27every.html
