3 Lessons From Closed Stock Markets
The threat of Hurricane Sandy forced stock markets to close for a second consecutive day even before the storm made landfall. The move certainly wasn't taken lightly; it will mark the first time in nearly 125 years that the New York Stock Exchange has closed for two consecutive days due to a weather-related event.
Those in the path of the storm have more pressing things to worry about than their stock portfolios. But even if you're well clear of Sandy's destruction, the timeout from the market's daily churnings gives you a chance at gaining insight about investing in general and your approach in particular.
1. Short-term trading leaves you exposed to the unexpected.
Warren Buffett once said that he bought stocks on the assumption that if they closed the market the next day and didn't reopen it for the next 10 years, he would still feel comfortable with his purchase. So if two days of a closed market is enough to make you antsy about your positions, then Sandy should clue you in to the additional risks that short-term trading entails.
Investors got a taste of that danger last week, when Google (NAS: GOOG) announced its earnings prematurely due to an error from financial printer R.R. Donnelley (NAS: RRD) , which mistakenly filed Google's 8-K with the SEC several hours early. As a result of the glitch, short-term traders were locked out of the stock for three hours during that trading day, one in which many traders would have sought to take positions in advance of the expected news after the market closed. For long-term investors, the three hours of advance notice didn't make much difference at all, and they instead focused on the far more important issue of what had led to such a surprisingly bad quarter.
2. Don't mistake market movements for news.
Many people think of important news events as being "market-moving." Yet while announcements that have an impact on a company's future success justifiably result in stock-price changes, don't make the mistake of assuming that the converse is true. Sometimes, prices move for reasons that have nothing to do with reality.
The ultimate example of this is the 2010 Flash Crash, in which the Dow Jones Industrials (INDEX: ^DJI) dropped about 1,000 points in a matter of minutes, only to regain the bulk of those losses shortly thereafter. Dozens of individual stocks and exchange-traded funds saw even more extreme volatility in their share prices, with Procter & Gamble (NYS: PG) and 3M (NYS: MMM) among many stocks that had their shares move in a $20 range over an extremely short period of time. Some less actively traded stocks posted trades for just pennies per share.
Clearly, some traders assumed that big price drops meant that some unknown news was moving the market. Only later did it become clear that a trading glitch was to blame for the episode. That's why it's important to know what's moving a stock before you decide to follow the herd in or out of your position.
3. You don't really need constant access to the market.
One of the major reasons why the ETF market has exploded in popularity is the idea that mutual funds don't give investors enough access to key market movements. Mutual funds only let you trade shares once every day after the market close, while ETF investors can choose any moment of the trading day to buy or sell shares.
Obviously, during a market closure, there's no liquidity at all, and no one can sell shares of either ETFs or mutual funds. But it also serves as a reminder that when you pull back and consider fundamentally important news affecting a stock, having a few hours' jump on the competition doesn't always mean that you'll make a better trade. Sometimes, those who wait will have a more complete picture of what's coming and therefore make a smarter decision.
Stay safe out there
The current market closures are historically significant for their rarity. But in your quest to stay safe, think about the impact that the closures could have on your investing methods both now and in the future. The storm may end up teaching you a valuable lesson and make you a better investor in the process.
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The article 3 Lessons From Closed Stock Markets originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend Google, 3M, and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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