A Random Walk with Jim Cramer

March 20, 2007

Economists agree that no one can predict the random short-term fluctuations in the stock market. Therefore, it is best to load up on broad stock index funds. I’ve never been comfortable with the random walk theory. This theory assumes the market is mostly rational and there exists perfect information (no insider trading). Both of these are false. The market is made up of lots of irrational investors that get sucked into fads (dotcom, housing, etc.). Once a fad gets moving, momentum players try to profit from the rise. Once the market picks up speed, mutual funds and institutional investors are forced to play along; otherwise, they’ll report returns far below their comparative index. Now Jim Cramer reveals that many big players are manipulating information, thus undermining the idea of perfect information. This means that investors are acting on stories in the Wall St. Journal or CNBC that are utter lies. It also means the short-term moves in prices are really bait to drive dumb investors to move the stock. I know of other traders who do the same thing in other markets. So what’s this mean? The stock market is a human social competition subject to all the normal human problems. It’s random in the same way a violent mob is random. Nevertheless, I’m mostly invested in indexes because I don’t have the time to focus on investing. I’m hoping the 20 year gains will be enough to retire on.

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