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This all begins with tweet from Michael Burry: “In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis”
This is a 108-page analysis on the impact that investors have on the markets overall value…and why the stock market simply won’t crash.
They started by asking the question: “If a fund buys $1 billion worth of US equities, slowly over a quarter, how much does the aggregate market value of equities change?” The average answer was that…for an EFFICIENT MARKET…the result would be 0.01, meaning…for every $1 that goes in…that should boost the overall market value by $1 and 1 cent.
This plays into, what they call, the elasticity of the market…which is a really complicated way of saying: how much the market valuation changes, if you buy a $1 stock while another person SELLS that same $1 stock. The result was just this: they found that investing $1 in the market, increases the aggregate market value by $5…not 1 CENT, like the average person thought.
The purpose was to help explain stock market volatility, find the root cause of rising prices, and estimate the impact of Fed Money Printing within the economy…and, when we have a ratio of 5-to-1…that means that, while companies have a record amount of cash on the sidelines…the stock market could continue going much, much higher.
Obviously, nobody can predict what’s going to unfold in the short term…and, ANYTHING could happen…but, still…study after study continues to show the same thing: if you have cash, it’s better to invest all of it immediately, than wait to invest….75% of the time.
As for myself…I’ve employed a little bit of a hybrid approach, where – I keep some cash on the sidelines as my “opportunity” fund in case a good investment comes up…but, with everything else… every single day…without fail…I invest a consistent amount in the market, and that’s it.
But, like I mentioned…statistically..it does seem like, the more likely investors are worried about a crash…the less likely there is a crash…unless, by doing the opposite…we actually wind up seeing a crash…because, we didn’t think there would be one, because people thought one would happen…
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*Graham Stephan receives cash compensation from Wealthfront Advisers LLC (“Wealthfront Advisers”) for sponsored advertising materials. Graham Stephan is not a client and this is a paid endorsement. Graham Stephan and Wealthfront Advisers are not associated with one another and have no formal relationship outside of this arrangement and Wealthfront Advisers only sponsors content that relates directly to Wealthfront. Any links provided by Graham Stephan are not intended to imply that Wealthfront Advisers or its affiliates endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. Investment management and advisory services are provided by Wealthfront, an SEC registered investment adviser. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance.