The world stock market is behaving weirdly since mid July. There has been extreme volatility at times which is infusing fear into the minds of small investors.
Why this volatility? Barton Biggs, the famous Wall Street strategist has the answer and has lucidly put in Newsweek (p-35, September 17, 2007).
At present stock markets are mainly dominated by hedge funds and trading desks. Those are run by people who are under extreme pressure to beat the benchmark or they may be shown the door by their intolerant clients. Most of them are not exceptionally brilliant and they mostly follow the simple method of momentum investing. They get panicked once the “market acts badly” or goes down and sell into the decline. “Selling begets more selling and vice versa”.
Conversely when the “market acts well” or goes up they are panicked again as they may miss the chance to make back their losses, the buying panic develops. Hedging of Indexes is another reason for the volatilities, the fund managers who held the illiquid bonds sold the major indexes short to safeguard themselves from falling income positions.
Barton Biggs is feels that “it is certainly healthy that the mortgage high yield debt bubble has been pricked”. The world economy is healthy and the developing economies are main driving force at present.
To him the small investors should not get swayed by the gyration of the stock markets and stay invested in reasonably valued good stocks in long term perspectives or in index funds. The big global companies and emerging market funds will serve the small investors.
Mr. Biggs is a respected name in American financial market.
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