The financial market system is the key to the process of investing and raising capital to fund economic growth. Active liquid markets are necessary to provide investors with future cash flows in return for their capital. These allow investors to realise the present value of a future stream of income. However, are we now increasingly obsessed with numbers to the detriment of making wise and sound decisions?
The information age has led us to believe that momentary precision reflected in the price of a stock is more important than the imprecision in measuring the intrinsic value of a company. In other words, it's much easier on the emotions and mind, but perhaps an illusion to own investments that don't often trade. This triumph of perception over reality was magnified in the bubble and tech wreck of 2000, and is equally true of equity and other asset prices today.
Maynard Keynes, a thought leader and economist of the sixties, saw this dependency on numbers as dangerous, noting that "the organisation of capital markets requires for holders of quoted equities much more nerve, patience, and fortitude than for the holders in other forms. Some will buy without a tremor unmarketable investments which if they had a continuous quotation available, would turn their hair grey".
Keynes was concerned about the implications for our society should "the conventional valuation of stocks be established by mass psychology of a large number of ignorant individuals". Rather than foreseeing the prospective yield of an investment over the long term of years, he said, it would be merely a battle of wits to anticipate the basis for conventional values in the next few months. He suggested that such a system would lead to violent changes in prices in the short term.
As Keynes suggested, obsession with numbers and ease of communication is a reality today. CTA quant trading models designed to buy or sell automatically on signals generated by algorithms move share prices violently up and down. When prices rally, it feels as if the cycle has changed, but it hasn't. Equities may have further to fall.
Investors in the stock market are going to be severely tested for the rest of this year and the next. If you have not made provision for cash liquidity outside of your investments in the stock market, the probability is that you will not stay the course, and will not reap the rewards when the cycle inevitably changes. Published, peer-reviewed academic work illustrates clearly that behavioural errors account for most investors' permanent losses.
To return again to Keynes, "investment fundamentals have become a mere bubble on a whirlpool of speculation". It is an irrefutable fact that in the long run, economics triumph over emotions.