How Stock Price Movements can Affect Fundamentals?

[Dennis Ng]

Have Forumers considered "Reflexivity" in stock markets?

Most "Value" investors are "trained" to think that as prices move lower, they should simply just "average down" becos if something is a Good Buy at S$1.30, it should even be a BETTER Buy at S$1.

However, have forumers read or considered "Reflexivity in the stock market"?

This is a theory started by George Soros.

In the book entitled "The Alchemy of Finance" (written by George Soros, this is what he wrote:

in Fundamental investing, stocks are supposed to have a true or fundamental value as distinct from their current Market Price.

However, he opined that stock price movements may ACTUALLY influence the "fundamentals" of a company, eg. credit rating, consumer acceptance, management credibility.

The influence of these factors on stock prices is fully recognised. However, it is the influence of stock prices on these factors that is so strangely ignored by the fundamentalist approach.

George Soros made 2 assertions:

1. markets are always biased in one direction or another (bullish or bearish).

2. Markets can influence the events that they anticpate.

He also said:"if the underlying trend has become overly dependent on stock prices, the CORRECTION may turn into a TOTAL REVERSAL.

In that case, stock prices fall, the underly trend is REVERSED (eg. from Bull to Bear market), and expectations fall even further.

In this way, a self-reinforcing process get started in the Opposite Direction. Eventually, the downturn (bear market) also reaches a climax and reverses itself (beginning of another bull market).

I hope my sharing of above can help some forumers lose money in stock market. I've managed to avoid losses myself.