You are very right..... good editorial in the WSJ yesterday---Don't Let Patriotism Dull the Market's Edge
September 19, 2001
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Commentary
Don't Let Patriotism
Dull the Market's Edge
By Roger Lowenstein. Mr. Lowenstein, a columnist for SmartMoney, is writing a book about the Internet bubble.
During World War II, patriotic citizens planted cabbage, collected scrap and lent their money to Uncle Sam. Since the World Trade Center attack, it has been suggested that our patriotic duty now consists of investing in the stock market.
Newspapers tell of traders buying stocks for Mother America. E-mail chain letters are lobbying for a capitalist counterattack, encouraging every American to buy at least a single share.
Such urgings are well-intended, but they misconstrue the function of investing and of markets. And acting on them would not reverse the bitter truth that America has suffered an economic loss as well as a tragic human one; it would merely transfer money from people who don't own stocks to people who do.
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As it happens, a patriotic alternative does exist, and one consistent with individual economic interests. The beauty of free markets is that the pursuit of private welfare usually also benefits the public. That is the truth expressed in Adam Smith's timeless metaphor of the invisible hand.
But the system only works when markets register prices that, as closely as possible, approximate the long-term values of individual businesses. Indeed, discovering prices is the market's most important job. (Providing liquidity, its other job, is overrated, but that is another column.) For markets to work, or at least to work well, investors have to behave as intelligently as they can. Society gains when investors rationally act upon self-interest, even upon greed; it suffers when investors panic, even in the name of patriotism.
Another recent suggestion is that the federal government bail out the airlines. But any such rescue should be structured with utmost care. It is proper for the government to protect the security and functioning of air traffic -- but not to protect the returns of people who invested in airline stocks. A much better use of government capital would be to invest in, or subsidize, a system of modern, European-style high-speed rail. It is possible that air travel will never be as carefree, and that flights won't be as abundant, as before. Presumably, trains are less susceptible than planes to being used as instruments of terror. High-speed trains might never be economic -- that is why a government role would be fitting -- but they could relieve airports of much of the burden, especially in the east.
Lastly, some have suggested that the government forward funds to prop up securities prices, especially if Monday's 685-point drop in the Dow Jones Industrial Average is followed by further selling (as it was yesterday). This, again, would benefit citizens who had invested in stocks at the expense of taxpayers who had not. Even worse, it would temporarily obscure the signals being sent by private investors, and thus keep markets from doing their real job.
We must understand that free markets also mean the freedom to sell. As this newspaper editorialized, the market's freedom to express itself, in a clear and orderly way, is more important than whatever opinion it happens to express.
We have, in fact, just emerged from a time in which markets did an unusually poor job at pricing securities. During the recent technology bubble, investors, though certainly self-interested, succumbed to extreme irrationality, and their focus was on anything but the longer term.
Indeed, one can say that investors in the late '90s did less than their patriotic best. Thanks to their poor investing decisions, the market sent improper signals and society's capital was misdirected. Billions were wasted in dot-coms and telecoms, meaning capital was not available (or was too expensive) for industries that could have used it productively. Thousands of young people who could have found gainful work in manufacturing or medicine started their careers in now-defunct Internet firms instead.
In short, any mistake in pricing -- be it one of overpricing or of underpricing -- costs society. We know from long history that such mistakes most commonly accrue when investors act in herds -- that is, when they imitate other like-minded and emotional investors instead of thinking for themselves. It is the great paradox of markets that a crowd of investors of varying levels of intelligence and information delivers better signals than could the wisest individual.
But this only happens when the market aggregates decisions that were arrived at individually. When investors buy or sell en masse, the crowd is not only dumber than a savant, it is dumber than a fool. Those who do so are less patriotic than any reasoned seller.
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In all likelihood, the market's plunge on Monday was an appropriate and, under the circumstances, measured response to the changed economic environment. It may also have been a continuation of the recent slide, a further adjustment of a market that probably was still too high before the attack.
The right course for civic-minded, and also profit-minded, investors, now as ever, is to think cogently about the values of individual stocks. And they should value them not for next week, but for two or three years down the road. Then each may buy, sell or do nothing as the case suggests.
The financial media should also focus more on the longer term, and mute their reactions to daily fluctuations. All this will help markets send the appropriate signals -- not only about the contraction that is very likely underway, but about the robust recovery that is sure to follow. |
