SCOTT JAGOW: A month ago, all the talk on Wall Street was about record highs and boom times.Since then, of course, things have seemingly gone awry. Big losses overseas, subprime mortgage problems. But Newsweek's Allan Sloan believes investors have simply let emotion get the best of them.
ALLAN SLOAN: Whatever the subprime problem is — and it's not clear what it is, except it looks sort of messy — there were signs of it a month ago. And the market is supposed to be what they call a discounting mechanism. Today's prices are supposed to reflect what people see coming. And people saw subprime problems coming. People knew, for instance, that the Chinese market is sort of weird because even though China is an important country and has an important economy, the Chinese stock market is a joke. So, suddenly, the story is at the end of February, as you remember, "My god, there's been a sell-off in the Chinese market. The Chinese economy is tanking. The end of the world is at hand . . . " Which makes no sense, whatsoever.
JAGOW: So, nothing has changed.
SLOAN: Well, what has changed is the perception. It's astounding to me that a month ago everything was an excuse for stocks in the U.S. to go up. And people were explaining away the rising thing. You know, it's the Goldilocks economy, interest rates are low, yadda, yadda, yadda. . . . Now, it seems, that whatever happens out of the total ordinary is an excuse for the market to go down. It's just another example of why you should not tie your mental or entire financial well-being to the market. It's an example of why money market funds exist.
JAGOW: Well, how much of a role should emotion play in investing?
SLOAN: In reality, of course, it should play no role. And if you look at all the textbooks and financial stuff, everything is presented as if the world is rational. In fact, the world is in many ways not rational in the short run. And, emotion plays an enormous role and we've now gotten a great wake-up call for this that emotions matter in many cases as much as the funamentals.
JAGOW: So, how are you feeling this morning, Allan?
SLOAN: I'm feeling optimistic as always, Scott.
JAGOW: All right. Thanks a lot. . . . Allan Sloan, the Wall Street editor for Newsweek magazine.