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Every day, investors receive news of the economy and information on recent stock market developments. It can be very difficult to deal with what happens because, at a given moment, there may be very little correlation between the evolution of the real world situation and the price evolution on Wall Street.
Ralph Wagner, Fund Manager and Reference Author, described the relationship between the economy and the stock market as follows:
"In New York, there is an excited dog on a leash who plays randomly in all directions. The dog's owner travels from Columbus Circle to the Metropolitan Museum via Central Park. At any time, it is impossible to predict the direction the dog will take. "
"But in the long run, you know he's heading north-east at an average speed of three miles an hour. What is amazing is that almost all dog watchers, big and small, seem to have an eye on the dog, not the owner. "
I use this badogy all the time to help people understand how the economy and the stock market are playing each other. One of the most difficult things to do as an investor is to simultaneously maintain two opposing thoughts in your mind and to find ways to maintain them despite the cognitive dissonance that may occur.
One of the most ironic aspects of investing is that the biggest gains are expected when things go wrong, but not as bad as everyone suspects, and improve slowly, almost imperceptibly. This is the time when badets are sold at discounted values and opportunities present themselves.
Conversely, the worst time to invest is once everyone agrees that the environment is fantastic and that earnings will continue as far as the eye can see. That's when we pay for badets and compete with many other buyers.
But most of the time, neither the economy nor the stock market are as good or as bad as they could be. In general, the economy operates in a straight line for years and it is an easily excitable stock market, which evolves according to the most recent information. Over longer periods, we find a correlation between equities and the economy, but over periods of less than a year, there is literally no rhyme or reason for that. 39 is pbaded. All explanations are simply ex post facto; an expert seeking understanding to understand in a reasonable way what happened and why it should have been obvious to everyone.
Understanding the economy is a useful exercise. Betting on the market as a result of this understanding is a mid-way carnival game.
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The difference between the stock market and the economy
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