Why the Market is Irrational

Why the market is irrational?

I want to think about the reality of the stock market, is the stock market really the best place for investment?

Is the stock market predictable? In my experience, the stock market cannot be predicted, but you can use data and probabilities as a basis of whether to invest in a stock or not. The stock market is unpredictable in the same sense that some news and events cannot be predicted. 

Is the stock market the safest investment? I could tell you that you could lose half of your money in the stock market and wait decades (in some cases) before you can recover it. So yes, the stock market is not the safest investment on earth. Even the legend investor, Warren Buffett has a story of loss. In June 2018, Buffett’s holding company, Berkshire Hathaway, acquired 250 million shares of stock of Apple; by November 2, 2018, Buffett lost more than $3.5 billion of its value (source: Warren Buffett loses nearly $4 billion in single day on his Apple stake). 

One might think that I’m being too pessimist (negative), but that is not true, there are tales of triumph and gains only if you invest carefully. Take the case of the banking industry in the Philippines. On January 11, 2019, news about Hanjin Philippines bankruptcy spread on the internet like a virus causing a downward shift in the stock price of banks with loan exposure to the said company. Metrobank (MBT) for example plunges from P82+ level to P76+ level after the news-scare, now as of this writing MBT is back to 82+ level (note: this is not a stock recommendation). If you examine the scenario, one might think that this is not a good time to buy stocks since the price might go down further, but if you examine the history, Philippine Banks have been in a worse situation than this (Asian Financial Crisis is worse) and yet they survive; thus, in this case, a bankruptcy of one corporate institution will not result to the bankruptcy of whole banking system of the Philippines. With that in mind, an intelligent investor has already gauge that the declining stock price of banks is temporary and an opportunity to buy more stocks. 

The key here is that investors and traders should always recognize that investing in the stock market has risk and that the stock market is not a fairytale of gains and always gains.