The Worst Reason to Panic About the Market
May 24th 2013 5:15PM
Updated May 24th 2013 6:25PM
Imagine you've just purchased your dream home. It's everything you wanted. Three bedrooms, a backyard, a porch, and a great neighborhood near a nice park. You paid $300,000, which you regard as a fair price and one that fits your budget. You could not be happier.
Then one day you wake up in horror. You check Zillow.com to see your new home's estimated value, and are met with a "page not found" error. Zillow's servers are having a bad morning. A few minutes later the site is back up, but is missing data and offers no estimate of your home's value.
Panic sets in.
"Sweatheart, we have to get out of here," you holler to your wife.
"Take the kids to the neighbors. It's not safe here anymore."
Minutes later Zillow is back and running, verifying your home's estimated value at the same $300,000 you paid for it.
Still, you feel cheated. "We have to sell this place," you inform your family. "It's too dangerous. The value of our home lost 100% of its value before breakfast, and then gained it all back just as fast. I love our home, but this just feels like a casino."
The local news agrees. "It was a wild day on Spruce Street, as the brown house by the cul-de-sac saw its value plunge to $0 before recovering sharply minutes later." The panel of experts all agree that we need a Congressional hearing to assure such madness never happens again. "We can't just be gambling with people's homes."
This story is, of course, ridiculous. No one would ever consider their home worthless because of a five-minute Zillow glitch.
But when we think about the stock market, ridiculous becomes par for the course. Replace "home" with "stock" and "Zillow" with "CNBC," and we've just described the flash crashes of the last three years.
The first flash crash came in May 2010, when computer glitches sent the Dow Jones down 1,000 points in mere seconds before gaining most of it back just as fast. It was front-page news for days afterwards, and is still discussed three years later. Ever since, the market has been hit with flash crashes in individual stocks in what, as best I can tell, has become a monthly occurrence.
The latest came yesterday. As The Wall Street Journal writes:
Within seconds of the opening bell Thursday, shares of American Electric Power collapsed 54%, trading as low as $22.28 after opening the day at $48.18. Moments later, the stock was back near $48.
NextEra Energy also took a brief stutter. A handful of early trading prices were quoted about 60% below the day's normal trades.
Both companies are fine, thank you very much. No power plants blew up. No lights went out. No dividends were cut. An AEP spokesman confirmed that "None of the trading was based on any news out of the company." NextEra CFO Moray Dewhurst commented:
We are continuing to try to understand exactly what happened in the first few minutes of trading in our stock this morning ... This is naturally a concern for all our shareholders and potential shareholders.
To which I reply, "Are you kidding me?" Guys, go back to work doing what you do -- making power. If you have shareholders whose view of your company is influenced by a few seconds of computer glitches on the NYSE, you are better off without them. And they are better off without you.
A company's value lies in its assets, its people, its brand, and, ultimately, its ability to generate cash flow. Its stock price is completely removed from these details, especially on a minute-to-minute basis. It is no different than comparing a home's true value to its price quoted on Zillow. When you buy a home, you buy it for the actual structure, not the Zillow quote. And when you buy a stock, you are buying an actual business with actual assets run by actual people, not a digital ticker tape.
As fellow Fool Ron Gross says, it's not a stock market, it's a company market.
Try to enjoy your companies as much as you enjoy your home.
The article The Worst Reason to Panic About the Market originally appeared on Fool.com.Fool contributor Morgan Housel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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