No Conviction, No Floor: What Determines a Stock Price

A stock price is where a seller will sell and a buyer will buy. The bid and the ask. That's it.

The noise

Charts, indicators, experts, headlines. Most of it is nonsense. All of it is groping at two questions. Do people have conviction? And is there money ready to buy?

1929

Roger Babson called the crash. In September 1929 he warned that one was coming. But he expected a bear market, not a depression. Even he didn't imagine an 89% fall.

The depth came from no conviction. People weren't holding stocks because they believed in the companies. They held them to sell to the next guy. When the next guy stopped showing up, there was nothing underneath. No buyers. No bids. An avalanche.

The trap

Selling in 1929 wasn't the mistake. Coming back was.

The market rallied into spring 1930, and people who had sold bought back in. Then it slid for two more years. By July 1932 it was down about 89% from the peak. The same trap opened again in 1937 and 1938.

Conviction

Why does someone hold a stock? Either they believe in the business, or they think someone will pay more later. The first kind of holder absorbs selling. The second kind runs.

The incremental dollar

Prices are set by the next dollar. When safe bonds pay 5 to 6%, stocks have to clear that bar. When they can't, the dollar leaves.

The weighing machine

Graham said it: in the short run the market votes, in the long run it weighs. Votes are noise. Weight is conviction.

Ask your advisor

Before the next dollar goes in, ask: do you have conviction, and why should I?