Shock and awe

I have to admit that I have been taken aback by the financial markets’ big sell off over the last month, mostly due to concerns that the EU would implode.  In my opinion the Europeans are making legal and economic reforms that have needed to be made for over a decade.  My shock, and awe, is that these weaknesses have been inherent in the structure of the EU from the beginning.  Yet investors were always content to look the other way in the past, especially as they bid up the value of the euro vis-a-vis the dollar.  Once there was a crisis the weakness of the structure was made poignantly clear to those (who I guess were) previously in the dark.  However, the EU response was noteworthy.  What’s more, the EU continues to make important changes.  Yet, financial markets levels have not appreciated measurably.  Instead jitters persist.

Why is this so?  It only takes a very small percentage of investors to move the markets dramatically.  Back in the dot.com era when trading volumes were gigantic and the volatility that pervades the financial markets today first took root, on an average day well less than 1% of market participants traded on a given day.  Yet that < 1% was able to move the Dow Jones Industrial Averages up and down by hundreds of points in a day.  My feeling is that a similar situation exists today.  Very few investors’ fears are creating more fear leading to more sell offs.  A crazy situation, really – serving as another example of market herd behavior.

What to do?  When financial markets begin reacting to fears as opposed to data it is often a very good buying opportunity.  I first said this about 1,000 points ago in the Dow.  However, I still feel that for long-term investors (which I am) it is an excellent time to buy shares in businesses that interest you.

Jason