HBTM: 12-27-2016 Dow 20,000 Edition

How ‘Bout That Market?  This is a question I hear at social gatherings often enough that it makes sense to make it a regular entry on this website.

The Market

The last week of the year is usually pretty sleepy.  This year’s final week is book-ended by holidays which means a terrific drive in to work for me as everyone takes advantage of long weekends.  I don’t usually expect financial news this week, but this year the Dow Jones Industrial Average is bumping up against 20,000 which is a MAJOR MILESTONE/PSYCHOLOGICAL BARRIER.  Will we hit 20k?  It wouldn’t take much, but it really wouldn’t mean much either.

20,000 is just a number.  Don’t forget that the DJIA is just 30 stocks and the index is price-weighted rather than market cap weighted.  This means that even though Apple is the largest public company on the planet, eight other stocks have a bigger impact on the Dow because the price of one share of their stock is higher than Apple’s.

Regardless of the importance of Dow 20,000, one thing is clear:  if you were invested over the last couple of months, you’re feeling pretty good about things.  The Dow went from under 18,000 the week before the election to near 20,000 this week.  When things go well in the market (or in life in general), we tend to take credit even though sometimes the real reason for that success boils down to luck.  So how can we stay humble in the face of investing success?  I suggest trying to predict the market over basically any timeframe.  Write down your prediction for where the Dow will be a week or a month from now and see how close you get.

It is popular to consume market data then regurgitate some prediction based on it.  I find it more helpful as an investor to spend more time analyzing other people’s reactions to the markets.  It is fascinating to pay attention to how different people interpret the same data.  Is this person a bull or a bear?  What is their motivation for sharing their viewpoint?  Are they trying to sell me something?  Are they trying to bolster their reputation as an expert?  Where does financial news end and financial entertainment begin?

Do You Think It’ll Keep Going Up?

I think the stock market will be higher ten years from now, yes.  I do not know what path it will take to get there, but I know it will not be straight up.

The Disclaimer

Nobody knows nothin’.  The above is speculative bullshit.  If I had an inkling of what the market was about to do, I’d be on a beach in Antigua counting my money.  The same goes for your ‘stock guy’ and that dope on TV with the ponytail.  They don’t know what the market will do in the next week, month, year, or even the next 10 minutes.  They don’t even know why the market did what it did yesterday, last month, or last year, but that does not stop them from backfilling a narrative to explain an irrational, open system (as opposed to a textbook world of rational actors where all else is equal).  We humans seek these explanations out to find patterns in an effort to guide our future actions and justify past mistakes.

So why read this at all?  In my experience, 60% of people who raise the topic of investing in a social setting are seeking your approval.  30% are trying to establish themselves as an investing authority so they can sell you something.  The other 10% are genuinely interested in this stuff.  Ideally, this post helps you keep up your end of the conversation.  More importantly, I hope it helps you spot why the discussion turned to investing in the first place.