The Money, Honey: Stock Market Counterintuitiveness
By Rita Warren ~
There is something called counterintuitiveness when it comes to investing in the stock market. Here’s how it goes: when something that seems bad or negative happens in the world of economics or politics, or when the government makes a decision or votes on something one way or another, there is usually a backlash in the stock market that you can count on and make money on if you know how to pick stocks accordingly.
For example, this morning the big news is that Congress and the President seem to be in agreement that the Bush tax cuts will stay in effect for two more years. Now, without going into the politics of all of this, and without parsing through why the stock market seems to like it, the reality is that the stock market as I write this is up 62 points. Go figure. This may put us more into deficit mode for the future, and our children and grandchildren may wind up spending their lives bailing themselves out of the mess we have dug for them, but for the present, the stock market likes what it is hearing. So could you make money today in the market? Yes, you could.
So even though the deficit in the U.S. government is increased by what is happening today, and even though that sounds like it should be a bad thing, for the stock market, there is something else at work: the uncertainty about the tax situation seems to be alleviated for the present, and we know that there will be no new taxes, which always comforts investors (both the lack of uncertainty and no new taxes). So investors feel better about buying stocks, and buying stocks they are. How long will this last? No one knows. But for today, or for the hour that I’m writing this, the market seems to be in an up mood.
Another counterintuitive acknowledgement: good companies can be lousy stock picks. If you look at the field of well-known brands of buyable companies, like General Electric, the Gap, McDonalds, Coca Cola, Starbucks, you could make the assumption that because these names are so familiar they are also great stocks to buy. Not so fast. There often is no correlation between how good a company is doing with how well its stock is doing. Sometimes, a stock sinks while a company soars, and sometimes vice versa. Of course, most stock analysts will tell you to do your homework before you invest in a company’s stock: check their quarterly reports, make sure their profits are showing, their earnings are what they should be, and so on. But keep in mind that, ultimately, this is no guarantee that the stock will continue to go up. It helps beat the odds that the stock will appreciate if its numbers are good rather than bad, of course, but don’t let that fool you. It’s no guarantee. And walking into a Starbucks that is crowded (aren’t they all?) does also not prove that the stock is going to be a winner by the end of the year. It just means, well, that the stores are doing business. Not bad, certainly, but not a solid indication that you’re going to double your money in the stock market by buying Starbucks stock.
So counterintuitiveness in the stock market can often pay off if you know how to play it. Or if you know how to spell it.