Wall street sell off, and CNBC the drama queen

I love allegories; one of my favorites belongs to Benjamin Graham.

Three years ago i was reading his book the “Intelligent Investor”, with each page i folded; i became more fascinated and enlightened by his wisdom.

As i reached chapter 8, Page: 204, i began reading about Mr. Market, which he describes as your partner that:

  • “Every day he tells you what he thinks your interest is worth”
  • “Lets his enthusiasm or fears run away with him, and the value he proposes seems to you a little short of silly”
  • “You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low”

What is happening now to the market is completely normal, and CNBC is a drama queen for notifying investors about each 100 points drop or rise in the markets.

What caused this sell off on Friday, is the very good numbers that were released about the wage growth.

If the wages are growing, companies need to raise the prices of their products so they can pay accordingly to their workers, higher prices for products leads to a low demand, and low demand eventually leads to lower profits for companies.

Investors were afraid that the fed will start raising interest rates faster than anticipated to cool the overheated economy, and the 10-year treasury bills yield started surging fast too, Rising yields are an indicator for a good economy.

The treasury bills are U.S. government’s debt obligations, the yields are interest rate that the U.S. government pays to borrow money, but more importantly those yields also influence the interest rates that individuals and businesses pay to borrow money, which will also affect companies.

Interest rates act like a gravity force for the markets, whenever they go up some things start happening, and one of them is that investors usually start selling stocks, hence stock prices goes down. I think this is a good thing what’s going on right now; stocks ran up high for a long time now. Although the fears might be overdone, because if you are laying money for the long run and you have a pile of cash (equals 20-30% of your portfolio) you can take advantage of those sell offs and buy the bargains that pops out and just wait. If you don’t want to value stocks, buy low cost index fund, and the right time to buy it, is always; and especially when the stock market is going down.

Buckle up, and enjoy the ride.

References: The Intelligent Investor by Benjamin Graham, Investopedia.com