This morning, I’m feeling like Old Snake from Metal Gear Solid 4. “The market has changed,” it follows illogical rules. I remember when I first started out, there were technical traders and fundamental traders. Those that identified opportunities based on price trends, and those that identify opportunities by the quality of the company compared to the current price.
If these were the only people trading, their actions would influence the price in a self-balancing way. Instead, it seems that the majority of the price movement is driven by what celebrity investor is buying what, or short term news with little long term implications to the business.
It can be a blessing when these market mood swings allow you to pick up a quality company at a discounted price, but it’s also frustrating to observe an irrational world in chaos.
For instance, I own YUM in my personal account. I think it’s a solid company, but my main reason is I love me some Taco Bell. Today, YUM’s stock price has jumped up 5% after Third Point announced that they bought a position in the company. This brings their PE Ratio up to 40, which is insane.
It aggravates me because this great company has had such a drastic price reaction to one opinion about the company’s future.
Perhaps I’m ranting over nothing, but as a logical person, these illogical swings shake my faith in the system being steady.