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WORK & MONEY TWO SIDES TO EVERY TRADE Published November 18, 1996 Other Columns by Ken Kurson Tripod Interview with the author	It's enough to drive a pessimist crazy. Month after month, the newspapers report that the wild inflow of money into the stock market has continued. Every half-ass public offering and two-bit "cyber" this-or-that gets snapped up at prices that would make Keynes think his "greater fool" theory hadn't accounted for knuckleheads with 401(k) plans. Most of this money finds its way into equity mutual funds. Fund managers, under pressure to keep shareholder money fully invested in the stock market, try to find places to park the dough. With most of the bargains picked over by a 6-year bull market, they look for stocks that aren't quite as overvalued as others. It's a goofy job, with results graded on a short-term, when a longer period would be more appropriate for nearly all investors. But with a mutual fund, at least there's a professional investing the money, one who's presumably endured a down market and knows how to avoid the panic-selling that can ruin a portfolio. What's scaring me lately is the number of market neophytes who, having read a couple magazine articles and surfed the Internet, think that they know enough to pick their own stocks. These investors are chronically under-diversified, usually piling on stocks in sectors that have the capacity to post spectacular gains -- and suicide-inducing losses. So before you join their ranks, keep in mind that there are two sides to every trade. One of the hardest concepts for the newish investor to grasp is the idea that every single trade represents a difference in perception between you and whoever's on the other side of the transaction. If you are willing to fork over $100 for a share of company XYZ, it's because you think that share will be worth more than $100 someday soon. But that means whoever's willing to sell that share of XYZ to you thinks he's getting a pretty good price. The fact that he's willing to sell means that he thinks the share will either soon be worth less than $100 or that it'll take a lot longer to show a profit than some other place he could put that hondo.
Every time you make a decision to buy or sell, somebody out there disagrees with your prognosis.	Same thing when you sell -- if you're convinced a company's future looks cloudy enough for you to bail out for $100, whoever buys it disagrees with your prognosis. So the question an investor has to ask himself before every trade is "What do I know that the other guy doesn't?" With ever-larger chunks of the market being held by institutional money managed by professional investors -- as opposed to little guys like you -- that's a daunting question. No, it doesn't mean that you should never buy a stock. It just means that unless you're in it for the long haul, wherein even poor timing will usually be overcome by the general uptrend of the market, your hunch about a company's prospects had better be damn well-founded. That's one of the best things about the market. Everyone's in it for the same reason: money. There's no need to psychologize about the motives of the guy on the other side of the trade. But there is an ever-present imperative to resist the temptation to think that your intuition is somehow superior to that of the people who do nothing but cogitate on the direction of the market. It's pure hubris.
To assume that your intuition is superior to that of market wizards is pure hubris.	Perhaps an example will best demonstrate the point. Say there's a fellow -- we'll call him Keith Karson -- who fancies himself pretty smart about the market. It's Spring 1995 and the steamroller of hyperbole that became Windows 95 has just begun. "Wow," thinks Keith, "with all this talk about Microsoft, I bet Apple is a pretty good value right about now." Karson bestows upon himself that most overused of investor cliches -- "contrarian" -- as he figures one of two things could happen: (1) Windows 95 will be a fiasco -- delayed or buggy, it'll so frustrate PC users who have been holding their breath that they'll all buy Macs. Or (2) Windows 95 will be a sensation, causing Apple to realize once and for all that it can no longer go it alone, sparking a bidding war that'll send Apple shares skyward. In July, Karson plunks down $46 a share, convinced he's looking at a win-win. Cut to early 1996. Windows 95 met most of its lofty expectations, while Apple has just compounded the mistake of being undersupplied through the end of '95 -- by being way oversupplied for what turned out to be a disastrous Christmas. Management is literally on life support as suitors do indeed hint at a takeover several dollars from where the stock is trading. Several dollars UNDER, that is. Karson bails in early February, thankful for the 28 bucks someone else thinks each of his shares is worth. A nearly 40 percent loss, but as his dad told him many times (and was snidely dismissed just as many), it's a cheap lesson.
It is virtually impossible to outguess the market on a consistent basis.	The point is that it's virtually impossible to outguess the market on a consistent basis. Your reasoning's not going to outsmart the analyst whose day is spent poring over historic p/e ratios and macroeconomic trends. And if your information's so good that it'll make you money, you're likely to end up sharing a cell with another chastened arbitrageur. Despite these barriers, average Joes and Janes ought to feel good about buying stocks. There's no better way to learn than by doing, and the fact that stocks have generally produced better returns over the long haul than their safer brethren -- bonds and money markets -- is indisputable. Obviously, the key phrase here is "over the long haul." So if you've got a kitty saved up, along with some years to let it ride, feel free to take a flyer on some stable companies whose business interests you. But don't be the sucker every hustler looks for when he comes to the pool hall. Trying too hard to pretend you know what you're doing might be the best way to convince someone you don't. Ken Kurson, 28, writes the "Advocate" column for Worth magazine and appears weekly on CNNfn. His money 'zine, "GREEN: PERSONAL FINANCE FOR THE UNASHAMED," is published quarterly and is available for $3 an issue or $10 for a year's subscription. For more information or to subscribe, write GREEN at 245 8th Avenue, Suite 286, New York, NY, 10011. © 1996 Ken Kurson, All Rights Reserved