Wednesday, July 29, 1998

Rational Irrationality
by Martin Kellman
([email protected])

"If you think that Microsoft is about to make a move but you are not sure in which direction..." boomed the authoritative commercial voice on CNBC. This was not the Psychic Network. How do you sense a move but not know which way? A plethora of slick ads followed. One pictured men and women leaving sexy bed partners to indulge their passion for trading. Another showed men driving cars with quote machines and cell phones in hand. A third promised unlimited day trades for people "whose long-range view is an hour and a half." In any gathering of pundits, someone will dismiss all discussion with Burton Malkiel's Efficient Market Theory, that all information is already in the stock price and, therefore, the market cannot be beaten. The pros, they say, have better information.

This may operate in the long run but Keynes reminded us that in the long run we are all dead. But, since low bond yields have herded all the old people into brokerage houses to watch the tape, and the rest of us to our Internet connections, the market is no more rational than Pierre Salinger or Matt Drudge. If Mark Twain thought that lies went around the world before the truth got out of bed, imagine what Bob Hope thinks. When Telecommunications Inc. announced its ill-fated merger with Bell-Atlantic, a sleepy company with the symbol TCI shot up. Would it happen again in its most recent merger attempt? It did. If United Health Care falters, U.S. Health Care stumbles; the vision in those brokerage houses, particularly among the retirees, is not what it might be.

Picture an infinite number of monkeys over an infinite number of keyboards hearing that Sheik Yorbuti grimaced at an OPEC meeting. Airline stocks plummet as if fuel were their only expense. High oil prices mean it's time to sell airlines because airline stocks descend when oil prices go up. Add to this farrago the commission brokers. If your doctor pronounces you in perfect health, you are still billed, but brokers can only profit if they find an illness in your portfolio and convince you to cure it with a trade. Hence the daily alluvial procession of conflicting upgrades and downgrades which move markets and bleed customers. It is happening to Merck as I write this. What is the difference between "buy" and "accumulate"? The only ways to accumulate without buying involve either matrimony or jail, both too expensive. What does "hold" mean? If I shouldn't buy it, and can sell it for practically no fee, why should I hold it? Shouldn't I be accumulating what they suggested I buy?

What is a stock worth? If people want Amazon at $130, it is worth that as much, just as a Beanie Baby is worth what it brings. If I own Microsoft, why does the value change when its earnings increase by a penny? It pays no dividend and does not intend to; it will not be acquired for cash and it will certainly not be broken up and its assets distributed. If Ford broke up, I might claim an Explorer, but what would I do with a cubicle and a programmer? So, the shares of Merck are worth $9 less today because people will not pay more. Is this rational? The various Fool strategies remain the best way to invest, but not to trade. When Louis Rukeyser chided John Kenneth Galbraith for calling the stock market "insanity," although his retirement fund was in it, he responded: "Whoever said you could not profit from insanity?"

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