Dow Falls 226! So What?
Posted on Wednesday, July 25th, 2007 | In Current Market NewsAbout 4:15 yesterday my blackberry started buzzing as the end of the day emails came pouring in. They contained the words “tumbles”, “plummets”, “free fall” and other dramatic phrases. My initial reaction in seeing them was to think the market collapsed and there was blood running in the street. After reading the details of a 226 point drop in the Dow Jones Average, my reaction was “are you kidding me?”.
Gang, 200 points stopped being a big deal a real long time ago and a whole lot of perspective is needed here. Look at it this way, if you owned a $140 stock and it dropped $2.26 today, would you panic? That is exactly what the Dow did. A piddly little $2 drop. Now, you might be slightly annoyed at the $2 drop but if anyone ever asked you how your stock did today would you say it “plummeted” or “collapsed” ? Me either.
We need to stop looking at the number gain and loss for the Dow and start focusing on it’s percentage gain or loss. As we climb higher and higher, not only are 200 point swings either up and own more insignificant, but mathematically, they are more likely. Both these scenarios diminish the importance of the event. It also stands to reason that as we climb towards 15,000 and then 20,000 (FYI, 20,000 is only 35% higher than today) not only should we expect more 200 point swings but we should logically expect the occasional 300 point swing to appear.
Again, this is really no big deal. It does makes for a snappy little headline though and those who live off inducing market panic for news purposes will start using colorful adjectives to describe these days. I mean, “Dow Plummets 226 Points” will attract more readers than “Dow Slips 1.6%”, right?
Stop looking at the points and start following the percentages, it will save you some unnecessary angst.
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 About Todd Sullivan (http://valueplays.blogspot.com)
Todd is a Massachusetts based value investor, that looks for companies whose current valuation is at a discount to their true value. When he purchase a stock, his typical holding period is several years, and he considers buying a stock purchasing a piece of the business. He feels that once he makes a decision to buy that eventually the market as a whole (however long it may take) will recognize the true value of the business and value it accordingly. His widely featured blog, ValuePlays, is a highly regarded investment resource that covers his successful investment strategies. |
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