When I was an undergraduate student, my finance professor related the story of a man who bought a stock for $10 per share. It climbed sharply to $20, then $40, then $60 and finally to $100. He was extremely proud of his investment. But then it began to drop, first to $90, then $70 and on and on. Finally it hit $10, his original purchase price, and he sold it. He remarked to his wife, “Well, at least I didn’t lose any money!” Continue Reading…
Consuming Too Much News Can Cause Financial Indigestion
As we watched the countdown toward signing a debt deal, the markets got quite anxious. There was a lot of news coverage about what would happen if the deal weren’t signed, who would get paid and who wouldn’t, and so on. No doubt a lot of stock trading was done on speculation about the debt deal. There was a brief sigh of relief as the deal was done on Tuesday and the threat of default was removed for the time being. I say a brief sigh of relief because the market subsequently dropped later that week as investors digested the details of the agreement. Then the S&P downgrade happened Friday evening only three days after the debt deal was signed. More turbulence followed in the markets the next week. Continue Reading…
Playing Those Mind Games in the Stock Market
Whenever I run into a former student and we are talking about past classes, it’s always interesting to hear them describe the grade they received. A student that did well will typically say, “I made an A in your class,” while a student that did not do so well might say, “you gave me a D in your class.” Notice the difference. In the first case, the student attributes the good performance to himself while in the second case the bad performance is somewhat shifted to me, the teacher. Continue Reading…
Economics 101: People Behave Rationally?
In the basic economics course, a first principle we teach students is the theory of rational behavior. Stated simply, individuals make rational decisions about how to spend their time and money to bring them maximum satisfaction. If I buy a hamburger for $3, it’s because I think the hamburger will bring me more satisfaction than the $3 in my pocket or any other available choices at the time. Given that most of us have limited budgets and virtually unlimited wants, we often buy more of something if it goes on sale or less if the price goes up. We go about life everyday constantly making these decisions, even though on a somewhat subconscious level. Continue Reading…
Keeping Your Focus in a Dizzy Market
A colleague of mine has an uncle whose eyesight is on the decline, somewhat hastened by his drinking habits. On a visit to the doctor’s office, the physician told Billy he would have to quit drinking or he would eventually go blind. Uncle Billy replied, “Doc, to tell you the truth, I like what I‘ve been drinking better than what I’ve been seeing!” Continue Reading…
In Spite of Triple Play, Chicken Little is Still Wrong!
I began writing this column last Monday, a memorable day to say the least. I got to the office early to prepare for a 9:00 a.m. class and to begin work on this article. As I logged on to the Internet, I first saw the news of Lehman filing bankruptcy. Then, powerhouse Merrill Lynch was being sold to Bank of America. Finally, the world’s largest insurance company, AIG, was in desperate need of capital due to mounting losses, not from paying off hurricane claims mind you, but rather from portfolio investments going sour. Continue Reading…