There is a constant shift in the rationale traders use to support decisions to buy and sell. During the ‘60s, “synergy” became popular. The stocks of companies successful at acquiring other companies were bid up aggressively on the theory that, in the stock market at least, 2+2=5. But during the ‘70’s, after a series of bear markets had chastened investors, conservative analysis of book value and dividend history, not the synergy of the go-go years, provided a very different rationale for decisions to buy and sell.
A dramatic change in the culture of investing took place in Japan during the 1960’s. Japanese traders had traditionally viewed equities as a form of high-risk bonds. Stocks were purchased based on the strength of dividends; the growth of earnings was largely ignored. When American traders discovered the Japanese stock market, they found that price-to-earnings ratios for Japanese stocks were far lower than for comparable American issues. To the Japanese, local equities were fairly priced; but for Americans, Japanese stocks were bargains. Americans began to buy Japanese issues massively, based on an investment rationale imported from America. Almost overnight, the culture of Japanese investing changed, and one of the great bull markets in history was launched.
There is no disputing the importance of traders’ reasons for buying and selling. People routinely use reasons to support decisions of all sorts, and trading decisions are important enough to merit important reasons. But, as the above illustrations demonstrate, the fundamentals supporting trading decisions vary from period to period and from place to place.
There is a useful distinction to be made between reasons and causes. Earnings do not cause prices to move, neither do research reports, news bulletins, dividends, stock splits, the economy, peace nor war. These may be cited among reasons motivating traders to buy and sell. But the only cause of securities price movement is the buying and selling activity of traders.
Focus on causes, not reasons – on what traders do, not why.
