The nature of selling...

As we've addressed here numerous times over the years, the day to day direction of the stock market is determined by the desires, fears, opinions, attitudes and whims of buyers and sellers by the thousands upon thousands. Being one who helps others determine the right mix of investment assets to hold, I go to no small lengths to try and get a handle on the trends and signals that point to the optimal mix of assets for a given stretch of time for my clients' portfolios. Being one whose vocation it is to help others make investment decisions means, alas, that I have yet to figure it out. I mean, if I really knew for certain what the market was going to do during a given stretch of time, I wouldn't need a vocation, now would I? But I'm okay with that, for I know that no brain on the planet has the capacity to identify, let alone organize and assess, the countless ever-changing elements that might inspire buyers and sellers by the thousands upon thousands.

Sure, the market offers up a few indicators that make some sense. For example, people tend to buy bonds and utility stocks for the yield (interest on the bonds and dividends on the stocks), which means that when interest rates rise, the prices of existing bonds and utility stocks---as investors move to more attractive yields, or less interest rate sensitive securities---are very likely going to fall. That's easy to understand, however, it's not so easy to time; you have to have a feel for interest rate trends. And there's where we enter another world of variables too numerous to fathom. The following snippet is from the Mises Institute article that inspired this blog post. Everything the following says about the economy can be said about the stock market as well:

Economic activity is based on human actions, with very little empirical regularity. It may be a sunny day, and you have skied for three days. This does not mean you will go skiing on the fourth day. Your actions simply cannot be modeled like the reactions of lab rats in a biology experiment. Unlike the reaction to noise from the zombies in the walking dead, humans do not react necessarily to the same events in the same way. Economists at the Fed must be scratching their heads as to why businesses did not react to lower interest rates as it did after the dot-com bubble. It’s the old adage of “fool me once, shame on you; fool me twice, shame on me.”

All that said, there is one aspect of the investing process that I believe our brains can fully grasp, and that can allow us to comfortably engage in the act of buying and holding stocks: That would be the understanding that, while we can't know what inspires every seller of a share of stock in a given moment, we can know that every seller is, at the moment he sells, approaching the market from a short-term perspective. Here's what I mean:

*Sarah sells because she's making a large purchase and needs the cash...
*Sam sells because his son's college tuition is due in a month...
*Shelley sells because she's retiring and wants to secure enough cash for the next two years worth of withdrawals...
*Steve sells because he's retiring and wants to pay off his house...
*Sally sells because the market's up and it's time to rebalance her portfolio back to its 60% target to stocks...
*Seymour sells simply because he fears the next bear market is about to begin...

Sellers sell because they, for whatever reasons, believe that it's the right moment to move some or all of their portfolio out of the stock market. The decision to sell---while the seller may expect to stay out of the market for a long time, or, in the case of fear of the market, believes that his immediate concerns spell long-term trouble---is always inspired by immediate concerns. The comfort I alluded to above is on behalf of the individual who understands that when sellers force the stock market lower, their reasoning reflects timing considerations that are generally not the concerns of the investor I profile in the second to last paragraph below.

Now, for the buyers: Of course buyers can approach the market from a short-term perspective as well, but not all of them. The ones looking for short-term gains are playing the market in the riskiest manner. The short-term buy is a guess that the price of the market, or a specific stock, or some grouping of stocks, is about to move up quickly, then peak. The investor trader believes he can time the peak. And I wish him well...

The remaining buyers approach the market from a long-term perspective:

*Bill buys with his 2 year-old daughter's college in mind...
*Bonnie buys with retirement in 20 years in mind...
*Bob buys with his 20+ years of retirement income in mind...
*Brenda buys because the market's down and it's to time to buy back to her 60% target to stocks...

Long-term buyers believe that it's prudent to participate in the potential growth of the companies that will produce goods and services for a world of humans who will forever strive to improve their material lives---and they're, therefore, unconcerned with the short-term timing of their initial investment. In essence, their long-term objectives---for the appropriate portion of their portfolios---and beliefs, allow for the unavoidable volatility that occurs as sellers and buyers/traders determine the moment by moment pricing of the market:

Over the past few months I've offered you my thoughts, and the findings of my research, related to the present state of this unusually, but not unprecedentedly, long bull market---and I'll of course continue in the same vein going forward. My objective for this particular commentary was to offer you a somewhat deeper look into what inspires the closing, and most important, paragraph of virtually every one of my market commentaries. You know, that parting disclaimer that says no one can time the market, and that you shouldn't try, and that sanity in investing comes from diversification and a long-term approach, and etcetera...