The stock market fell over 5% this past week, and the financial media reported half of the story. The headline article in Friday’s Wall St. Journal provides a classic example. Here is a sample quote: “Volume on stock exchanges has spiked in recent days, a sign that more investors are piling into selling.” The thrust of the article is that “everyone” is selling, “no one” is buying, and that is what is driving the market down. Most readers do not question statements like this. They should, because such statements are misleading at best and flat out wrong at worst.
I have a simple question: If so many more people are selling than buying, to whom are they selling? Imagine this was the residential real estate market. Would they report that more houses were sold than bought? How can there ever be a mismatch between the amount of buying and the amount of selling? Every transaction has a buyer and a seller. More selling than buying or more buying than selling makes as much sense as a one-sided pancake.
Memo to the financial press: There is always the same amount of buying as selling. There was this past week, the week before, next week, and every other time period you care to measure.
A variation on this theme occurs when the press reports “investors are moving out of stocks.” Some undoubtedly were. But others were moving in. The net result is that the amount of stock held is pretty much the same from one day to the next, regardless of how many shares change hands, who owns them, or whether the market goes up or down.
So if there is never an imbalance between buyers and sellers, what makes prices move, and what makes them move more dramatically like they did this week? Prices change from previous levels based on how eager the buyers or sellers are to undergo a transaction. During the last week, the sellers were far less discriminating about the prices they would accept for the securities they sold. The buyers were very picky, only buying at reduced prices.
When the market declines sharply, the press does a fine job about reporting about the attitudes of the sellers, describing various reasons why fear and panic is justified. However, they ignore the other side of the transaction. Someone bought all of those shares the sellers sold. What was their motivation? Doesn’t that deserve a mention of some type?
Which side was making decisions rationally and which was making their decisions based on emotions? Which side was swayed by what “everyone” else was doing? And which method of making financial decisions is more likely to lead to long-term financial success? I have no idea whether the buyers or the sellers were making a better decision this past week; only time will tell. But if I had to make hundreds or thousands of such decisions over an investing lifetime, I would rather be on the side of the rational decision makers instead of the emotionally-driven ones.
So I have two questions for the financial media. Surely you understand this basic concept that the amount of buying and selling must be equal. Therefore, why are you not giving us the other side of the story? Do you not want your readers to learn about what is more likely to be the winning strategy?