Puzzled by Market's Mysteries? You're Not Alone
REBECCA ROBERTS, host:
There were several tough days on Wall Street this past week. On Tuesday, investors took a jab to the stomach. Thursday, ooh, there was a right uppercut to the jaw. On Friday, it was left hook to the chest.
Mr. JIM LEHRER (PBS News Anchor): The stock market kept falling today, ending its worst week in five years. The Dow Jones industrial average fell 208 points to close at 13,265. It's lost more than 500 points in the last two days.
ROBERTS: How bad was it? Wall Street's decline Thursday and Friday wiped out more than $525 billion in shareholder wealth from the stocks in the Standard & Poor's 500 Index. All this despite a Commerce Department report that showed America's gross domestic product rose at a better than expected pace in the second quarter. But investors cast aside that good news, they preferred to focus on worries that borrowing costs might be climbing for companies and homeowners.
There are other reasons for jitters. The market is having mood swings. It may seem like ancient history after this past week's numbers, but the week before, the Dow surpassed the 14,000 mark for the first time ever. Ten days ago, UBS' chief equity strategist David Bianco couldn't have been happier.
Mr. DAVID BIANCO (Chief Equity Strategist, UBS): We've got a global economy that's feeding upon itself, and that's some powerful phenomenon that we think will last for many years.
ROBERTS: That's what the masters of the universe were thinking then. Today, they're pondering gloomier scenarios. Phil Roth is the chief technical strategist for Miller Tabak.
Mr. PHIL ROSS (Chief Technical Strategist, Miller Tabak): Well, I think we're overdue for a bear market. An average bear market is about 20 percent over six to nine months. So if you would have put a gun to my head right now and said, how much is it going to go down over the next six months, I'll say, probably 20 percent.
ROBERTS: That kind of thinking is not at all reassuring to small investors. This woman spoke for many on Friday.
Unidentified Woman: Oh, terrible. I am very upset. That's where I'm going. I'm going to see my broker now about my money. And I'm worried because I'm a single person and I need that - I have to rely on that money for my livelihood.
ROBERTS: She's not alone. Many investors are at least a little bit worried about what's on tap when the markets reopen tomorrow morning. But option trader turned scientist, Nassim Nicholas Taleb, says, if you're that worried about losses on Wall Street, maybe you shouldn't be playing the game. He's the author of "The Black Swan: The Impact of the Highly Improbable." He joins us now from Westchester, New York.
Welcome to the program.
Professor NASSIM NICHOLAS TALEB (Option Trader; Author, "The Black Swan: The Impact of the Highly Improbable"): Good morning.
ROBERTS: So what advice would you give to someone like the woman we heard who's nervous about her investments?
Prof. TALEB: Well, I would say that if you have - well, she's making two mistakes. The first one is that if you have to worry on a weekend about your money it means you're overexposed to the market. And the second one, if you have to rely on a stockbroker's advice it means that you're a fool. And a lot of people are in the stock market that should not be in it.
ROBERTS: And what about people who's job it is to invest money for other people - brokers and investment counselors?
Prof. TALEB: You know what, I presently - I mean that that's a topic I've been investigating for a long time. These people don't know much more than cab drivers about the stock market. The problem is that we effectively have a pseudo-expert problem - these people who invest for other people, don't know much more than at random, yet they collect large fees for that.
ROBERTS: So you're saying that brokers who will come in tomorrow morning maybe look at what the Tokyo Stock Exchange did, look at where oil is trading, look at where the London Stock Exchange is - these factors that Wall Street turns to are just reading tea leaves?
Prof. TALEB: Exactly. They accept that they don't know it. They probably would convince themselves that they're doing something very scientific or very elaborate or very sophisticated. But in fact, I don't think that you can predict markets, and if you're relying on these people for you money then you're going to be in trouble.
ROBERTS: So why is it inherently unpredictable? Why aren't there things that you can turn to on a scientific level?
Prof. TALEB: Because - I mean, this is - it's much more complicated. The world is far too complicated for us to be able to predict what can happen. People don't know it. They spin themselves stories to try to convince themselves that they understand it, but in fact, our track record in predicting the future, and predicting markets in particular, has been horrible, particularly the track record of professionals.
ROBERTS: Are you saying that they vast majority of investors are not smart enough to understand the market or that no one is smart enough to understand the market because it is inherently unpredictable?
Prof. TALEB: I think the market is inherently unpredictable. It could be - you could probably have a minority of people capable of understanding it. That's very hard to know whether the success comes from understanding or from pure luck.
ROBERTS: So all of the market analysis we've seen since the drop on Thursday and Friday - people looking towards the housing market, people looking towards private equity money, looking at what foreign markets might do over the weekend - worthless in your mind?
Prof. TALEB: I - well, I don't think that the news and analysis move markets. I think that the markets move and then people find something after the fact that it can possibly explain what happened.
ROBERTS: So if you were in an alternate universe, a Wall Street trader, what would you do tomorrow?
Prof. TALEB: I would find another job, because if I have to rely on - if I had to worry about a 500-point drop or a thousand-point drop, or something like that, it means I'm doing the wrong thing.
ROBERTS: Nassim Nicholas Taleb is author, most recently, of "The Black Swan: The Impact of the Highly Improbable." Nassim Taleb, thank you so much for joining us.
Prof. TALEB: Oh, thanks a lot. Thanks for inviting me.
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