Share markets and rollercoasters

Yesterday the share market took a fall. Usual media hysteria followed. Why? Share markets are like rollercoasters, they rise steadily over time and then do a sudden drop. Then they rise steadily and do a sudden drop. There is years of data to show this pattern. It's been studied to death and is explained by a number of factors that are now pretty well understood. Why do we get so excited every time it happens? And more importantly why do people rush to sell when it happens? "Oooh, here's a chance to lose money -- I must take it!".

There is something completely counter-intuitive about the way people sell shares. If the house prices fall, people tend to stay put. When prices rise, they sell their house. But it's the other way with the stock market. The less someone offers for the shares, the more willing people seem to be to sell. It seems pretty crazy to me.

Still, we can profit by this crazy behaviour. Falls in the stock market are great buying opportunities. This morning I bought XYZ (not their real name!) shares for 81.5c. I'd been thinking of buying them last week when they were around 90c but didn't get around to doing it. Last night they closed at 84c and I offered to buy them at that price (thinking that was a pretty good deal), but so enthuasiastic were the sellers to offload them that when the market opened, they were offering them at 81.5c. So I get to buy shares at 81.5c when I was perfectly willing to pay 84c last night and 90c last week. But it gets better, in the middle of the day, I could have bought them for about 76c (pity I had to go to work), but by the end of the day they were back to 81.5c again.

So we have a share that fluctuated 8c in a day or around 10% of the share price or about 20% in less than a week. Now what happened to that company in that day or week to cause this variation? Nothing at all. It's not particularly exposed to the "subprime crisis" which supposedly underpinned the "crash" yesterday, a point the company announced to the market yesterday presumably in response to the falling share price. Indeed, I suspect that announcement caused the price to start bouncing back.

To me, these falls are just buying opportunities. Find a stock that lost a lot of ground for no apparent reason and buy it. Wait a month or so for the price to return to previous levels and you can pocket 5-20% for your trouble. Beats putting your spare cash in the bank! Of course, I have no guarantee that this is what XYZ will do, but clearly it's what I'm hoping it will do.

NB I didn't name the share, not to be secretive, but simply because I didn't want to appear to be spruiking it on a public blog. If you are interested, feel free to email me.