One well-known Wall Street adage claims, “The stock market climbs a wall of worry.” Yet few investors understand the meaning behind this. Too bad because The wall of worry lends investors power to discern whether risk of suffering catastrophic loss is growing. You might think success investing in stocks is to be found in companies whose risk of loss is only slight. Yet with so many variables involved (some beyond any company’s power to control) you are best served always remaining alert to moments when the risk of substantial loss is elevated. This requires you understand how the wall of worry is built.
As you may already know, so-called “value investors” typically do not concern themselves with a stock’s risk of loss once the company has been judged a solid, long-term prospect. Yet therein lies a rub! The fabled “long-term” and one’s own lifetime might not match up. Quite simply your life is finite. If the purpose of investing is to increase one’s wealth, and in so doing attain the finer things one might wish to enjoy in one’s own lifetime, then avoiding serious loss like the plague (no matter what type of investor you consider yourself) can only be a plus. Avoiding steep loss better assures that, over the duration of your lifetime the wealth you seek via investments in stocks more likely will be delivered. That is why you should care about the wall of worry.
Now, whether the wall of worry has anything to do with concerns trumpeted by the financial media is open for debate. Yet there is an easy way any investor can determine whether the wall of worry is in fact being climbed. Before digging further into this we should agree there are many reasons investors might worry. True as this is, though, there is but one meaningful thing any investor can do as an expression of their worry. As you know, for every buyer of a stock there is a seller. The buyer is optimistic its price will rise further. The seller is not. So, what a worried investor invariably does as an expression of his or her concern (i.e. worry) over the viability of that stock’s continued increase is, pure and simple, sell their interest in the stock. Granted, there are hedging strategies an investor might employ as protection against feared loss. Yet rather than complicate this discussion, let’s stick with simple facts because even these are extraordinarily useful.
With this logistical matter settled, then, how does one confirm the wall of worry is being climbed over the course of an advance, be it in a single stock or the stock market at large? Every share of stock bought and sold on any given day is recorded in the volume of shares exchanged. Were an increasing number of stocks being exchanged (thereby showing up as an increase in the volume of shares traded) at prices that likewise are increasing, therein is revealed the wall of worry being climbed. So, the wall of worry is shown by an increasing volume of shares exchange over the course of an advance.
This, quite simply, is all there is to it. Without the presence of the wall of worry during an advance — that is absent the volume of shares exchanged increasing — one can rightly assume complacency, rather than worry, is ruling the day. This is not to suggest complacency cannot persist for a period longer than one might think possible. Yet eventually will come a day when a complacent majority becomes a great danger to the viability of a stock’s increase. It is then the risk of substantial losses being delivered becomes heightened. Complacency in the riskiest of financial assets — stocks — is a disease that should be avoided like the plague if wealth to be gained investing over the long-term might more surely be enjoyed in one’s own lifetime. So, beware the advance accompanied by a diminishing volume of shares exchanged!
Tom Chechatka is a leading stock market psychology expert employing a unique brand of technical analysis to dynamically assess actions taken by the composite of market players over time. Money does, indeed, talk and its deployment in the stock market speaks volumes about the sustainability of any given trend up or down. Having become bearish in January 2000, bullish in February 2003, and bearish again in May 2008, Mr. Chechatka’s big picture perspective has proven valuable to all walks of stock market investors.