Tuesday, October 28, 2008

Why does the stock market fall?

I recall a story. British Prime Minister Winston Churchill was asked, "Sir, why is the stock market falling every day?"

His answer, "There are more sellers than buyers".

This is what is happening now to the global stock markets. Everybody (except Warren Buffett) is so negative. Nobody is buying. They expect the stock markets to fall.

The hedge funds have to liquidate their position due to withdrawals by the investors. They sell their holdings at any price. Some may be selling short. The wave after wave of selling will continue, until the value become $0. (Just joking. It will not reach this extreme point).

This is our wonderful global financial system, that has now totally collapsed.


Anonymous said...

can the value be 0 then what happens?
what about unit trust too? also 0??? then what next? all company stocks with 0 go burst???

Anonymous said...

more minibond ask for refund, more custodian unloading, more selling. You panic, banker panic, MAS panic, politician panic and the world panic.

GOD bless the world

Anonymous said...

In the stock market or any organized market, if there is a sale done there must be a buyer.

If so, how can you say there are no buyers except the wizard of omaha?

Just a small question from a cha kwei teow man.

Anonymous said...

Don't worry, things will recover, as surely as the sun rises and sets, but not in 24 hrs of course.
Just like there are births and deaths everyday.
Just learn from history.

Everlearning said...

Pardon me, if the stock I bought months ago is trading near to zero value, does it mean that the money I invested in this share is totally wiped out?

What if the business is still running? Can someone enlighten me, please? I am a newbie in stock market.

ym said...

think mr buffet has very differnt strategy, he has the funds and thus can negotiate better terms eg 10% pref shares etc..

also, he does NOT diversify and a invests in a few companies companies that he sees valuable or underpriced..

the stocks fall is a reflection of the bubbles, mispricing of risk, misallocation of real resources that took place over the past few years..

so instead of stocks being cheap now, perhaps stocks were expensive in the past?..

Anonymous said...

To everlearning. Yes if the stock you invest is zero value, then your investment iw wiped out.
If the company is still running, and it is having financial problem, the stock may be suspended, meaning you cannot buy or sell the share until the situation improvement eg, get extention/new arrangement of financing.
My first experience in stock market over 30 years ago is like that, the company bankrupt and I donot have a cent back.

To me it is a good experience beacuse the $900 I lost bought me a valuable experience and knowledge that if I do not choose the stock properly, doing homework (not listening to rumour and recommendation), I might lost a lot of money. Happy investing.

I like stocks like SMRT, SBS Transit, SPH, where the business are near monopoly. I donot think these company will bankrupt unless they have ascrupulous traders.

Everlearning said...

Thanks, 3:13 PM. I must think twice before choosing any stock.

For a starter, I think STI ETF will suit me better than individual stock. Economy will be in a bad shape if it goes zero value for this stock.

Financial Journalist said...

If the fundamental of your company is fine, value of the share price will not go to zero.

I think STI will fall to 1200, so do not buy so much yet.


Anonymous said...

Brendon is right, I also do not suggest to buy the stock/etf now, but ETF is a good choice. The market will be very volatile now before it goes into hibernation where the total trade on the SGX is say 100-200M. That should be the time to start picking up good fundamental stocks.


Anonymous said...

We are very near to some kind of intermediate bottom in term of timing. But in term of indices level, it is hard to predict.

Anonymous said...

Buffet can be the new Rockefeller with his buy-and-hold strategy.

Anonymous said...

The last time it went down to 1200 was in 2003 during the SARS period.

It is safer when it goes down to 800 to invest and that was in 1989 and 1997/98. See link below tracking STI since 1989.


Lucky Tan said...

Mr. Tan,

I actually think the market is making a bottom. My blog did an analysis and came to the conclusion that most of the selling we are seeing these few weeks is due to Lehman's collapse.

This selling will dissipate in the week ending 25 Oct 2008. I expect the market to have a short term rally in the following week. My views are similar to Jim Jubak I have a reference to his video in my blog article:


This is all for interest only as there is no certainty in predicting market bottoms. I'm just counting on my ability to observe and think.

Anonymous said...

The stock index is unlike inflation. Hence it may fluctuate between 800 ( or less) and 3400(or more) for the next 5, 10, 15 or even 20 years. So there may be many top and bottoms like a saw.

Inflation however is different. There is only one way and it is up. You can never get food, transport or property prices of 5, 10, 15 or 20 years ago. The only exception is technology products where it may be cheaper and better in the future.

Anonymous said...

I am concern for those cashing out from hedge fund. What will the fund managers do ?? Sell stock to get cash to pay those who are trying to redeem. This may be one reason for the sharp drop in share prices. There seems to be no logic nowdays in the stock market, the market is really very very very over sold, but there seems to be still very little buyers.
If you want to buy any fundamentally good stocks, it is ok provided you could keep them for say 5 years. Beware, Beware, beware.

Falcon said...

This is the best time to liquidate your policies that has amassed a substantial sum. If you have been dissatisfied with your insurers for whatever reason, now is the time to liquidate your policies, get the money and start buying into those good stocks whose prices have been depressed. The potential of it doubling and tripling is good in the next 3- 5 years while you can only expect a dismal returns on your policies annual bonuses since it has been cut and getting poor returns from now onwards.

Parka said...

For people who think that prices are low and this should be the time to buy stocks, THINK AGAIN.

If you're just buying because prices are low, then you're buying for the wrong reasons.

The correct reason to buy is if you see that there's value in the company's future. And MORE IMPORTANTLY, what their management team has been doing, what their company is planning to do.

People who invest by looking at numbers and charts will always have to look at them EVERYDAY. Why? Because you have to monitor every change and look for the right time to exit.

If you're investing in a good company with competent team, you'll have a sound piece of mind.

And if you don't know how to read financial statements, don't invest.

I'm not a stock investor though. I follow companies but I don't buy.

Blog Archive