Stock price moves: cause and effect

Whenever the market price of a stock goes up or down, many people ask, “What happened to cause the stock price to down/up (question is asked more often when the stock price goes down)?”

I think it is human nature to want to know the cause of things. People just want to be able to explain why things happen, and it is more common to want to know why bad things happen. I think it is one of the main reasons why we have religion. Some guy gets struck by lightning and people will ask what did he do to deserve that, and if people don’t know anything about how lightning works then they might say that he angered Zeus. I apologize if my “religious” reference offends anyone. My point is that people tend to make up stories to explain reasons why something happened. I think it gives them comfort if they know why because they might be able to avoid something bad happening to them in the future.

Now we see the same thing happen when a stock goes down. What caused it to happen? Can I see it coming next time and maybe sell it before it drops? As any good scientist knows, proving cause and effect has a high bar. It is not as easy as showing that two events are correlated. Scientists come up with a hypothesis and then design experiments to try to disprove the hypothesis. If they run out of reasons that could disprove it, the hypothesis becomes a theory. Eventually, a theory can become a law (i.e. gravity). Well, there’s several problems why this doesn’t work well (most of the time) with showing the cause of stock price movements. Stock prices are the result of a giant voting machine where individuals (buyers, sellers, bidders, and askers) vote their opinions with buys, sells, bids, and asks. The aggregate opinions is a marketplace for an individual stock and it determines the market price of the stock. There are cases where the opinions can converge on a very narrow price window; one example is when a company is getting bought out for a set price. So when you see stock price movements you are seeing a net change in the aggregate opinion of the marketplace for the value of that stock. Individuals change their opinions for a variety of reasons and some of the reasons might have nothing to do with the stock that’s moving. Example: a large shareholder decides that he wants to buy a $50M island and needs money so he sells the stock; one would expect the stock to move downward unless there are enough buyers who are changing their opinion such that they would want to buy that stock. Trying to figure out all the reasons behind other peoples’ opinions can affect your confidence in your own opinion.

As an investor, your job is to get good returns, and, as a picker of individual stocks, it is your job to analyze companies, figure out their value today, and try to predict what their value will be in the future. You must form your own opinions based on the available information. Watching the market prices and solely basing your choices on that is like basing your decisions on other people opinion. The more you know about the company, the market, the industry, economics, financials, world politics, etc, etc, the better choice you can make. It is also very important to know the difference between a fact and an opinion. For example, SKX earned $1.55 in EPS last quarter is a fact (assuming no fraud) while SKX is worth $160 (or any other number) per share is an opinion. SKX will earn $3 per share next year is an opinion.

So to circle back to the point of this post: how will SWKS’s expansion of filter operations in Japan affect the stock? Well, someone asked me for my opinion of the aggregate opinion of the marketplace for SWKS stock. I think a better question would be “How will SWKS’s expansion of filter operations in Japan affect the value of SWKS?” This question is slightly different because it’s asking for my opinion of the value of SWKS stock rather than my opinion of other people’s change in opinions of the value of the stock. An even better question would be “What information can you get from SWKS’s decision to expand filter operations in Japan?” The answer that you receive might lead to more learning and analysis which might make you more convinced about your own opinion about SWKS. This is what we are trying to do: take in new information and mesh it with past information to arrive at a more informed set of choices about our investments and our stock allocations.

Chris

45 Likes

So, Chris, what made SEDG go up and down yesterday? :slight_smile: :slight_smile:
I’m becoming more aggressive buying “Saul-type” companies and yesterday I bought SEDG. Interesting. I first made the mistake of buying it in my taxable account which was pretty much out of cash so it was purchased on margin. I discovered that right away and sold it for a net gain of $37. I then watched the price action for awhile and bought it in my IRA at a better price.
It was then past Philippines bedtime and I had a nice little gain on SEDG in my IRA and as usual I “slept like a babe”.
Woke up, cranked up the internet, opened MLB.com and E*Trade, saw that the Mets won and Conforto had 2 hits and scored three time and that I had lost 10% on SEDG (but nice green numbers on ABMD, SKX and BOFI).
No news at all on SEDG. Talk about a VOTING MACHINE, there it was in living color. A lot of people bought islands while I slept.
Now to decide if I want to add SEDG tonight or if I have enough. If I have enough, then shame on me for not “building a position”.
Time for my oatmeal,

KC

1 Like