Investors have plenty of reasons to distrust Wall Street, and some figure it's best to just avoid stocks rather than getting fooled again.
It's understandable that investors are so down on stocks. It's been a rough time
for Wall Street's credibility since 2000. There have been massive accounting
frauds, several market crashes, including the flash crash in May 2010, not to
mention allegations of crooked analyst recommendations.
These factors, magnified by the rise of split-second computerized trading, have
led some investors to throw up their hands in disgust.
Investors have some legitimate gripes with Wall Street. But they also need to
understand there's a big difference between how stocks behave in the short run
and what happens over the long term.
In the short term, stocks trade up and down based on fleeting factors powered by
speculation and imbalances between the supply of shares and the demand for them.
Speculation can ebb and flow based on the short-term feelings of investors and
their sentiment. But over the long term, the effects of speculative moves get
washed out. Things such as the company's size and valuation are overwhelmingly
more important determinants of how a stock will do, numerous studies have shown.
Investors need to remember that when they buy stock, they're buying a claim to a
company's future earnings and cash flow. Investors may disagree in the short
term how much a stock is worth and that leads to short-term ups and downs. But
over time, the driving factors that set the value of a company are its
fundamentals.
