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August 05, 2011

Don’t Watch The Dow!

Watching the day to day movement of my company's stock was one of the worst mistakes I and many other CEOs made. The Chief Executive of the US shouldn't make that mistake. Neither should our Board of Directors (aka Congress). Ben Bernanke should know better but doesn't. He took credit for the stock market going up; it'll be hard for him avoid feeding the market beast even more dollars to keep it from declining.

The deficit settlement was a small step towards government doing what consumers have already begun to do, living within its means. That's bitter medicine for the economy in the very short term even though it's a necessary part of a long term cure. But on Wall Street "long term" means the next quarterly report. Trading is done based on whatever rumor is expected in the next hour or so. Even if traders believe the economy will be stronger next year or the year after that because of the actions taken last week, they will still sell stocks if they think profits will be down this quarter because of less government spending. Plenty of time to buy in later for the rally. Or stocks move because they do – because a bunch of similar computer programs are all trying to get in or out of the market before their competitors do. As painful as a selloff is, it mustn't be used as a judgment on the policy of either a company or a country.

The bond market is a much better indicator of investors' long term view of a country's prospects. Despite talk that the threat of default (which might not have happened even if the debt ceiling wasn't raised) would tank the country's credit rating, the interest rate on short duration treasury went below zero yesterday to all time lows and the dollar rose. People were paying for the safety of holding the debt of the US government denominated in dollars. Yes, that partly reflects problems in Europe. But confidence in our currency and our bonds clearly means that the world thinks, after last week's action, that the US is more likely to pay its debts in full and have a robust economy than we were before the specter of default. Europe hasn't taken its medicine yet; we've begun to take ours.

The trouble with doing the right thing for the long term is that it is impossible to measure in the very short term. That's why it's much easier for politicians to take short term actions – like stimulus or a bailout – which have results before the next election despite the long term price. The greatest danger facing us now IMHO is that we'll panic as voters because of the difficulty of the next few economic steps without quite as much of a government crutch and elect people who promise us more palliatives and sugar pills. We can't let ourselves get spooked by the Dow.

Update: For why VCs and entrepreneurs shouldn't watch stock prices, see Brad Feld's Public Service Announcement For Entrepreneurs: Ignore the Dow.

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