Looking for info on cause-effect relationships in investing

September 17, 2007 7:32 AM

I am looking for books, Web sites and other resources that provide a list of cause-effect relationships for investors.

For example, if housing starts go up, then it probably follows that stocks for home furnishings and building material suppliers will also rise. Perhaps stocks for rental property management groups might decline because of increased housing capacity in the market.

I am looking for some reference material about these types of relationships, particularly that which is aimed at a person who does not have any significant formal background in economics but who is reasonably intelligent and not afraid of learning new things.

posted by tomwheeler to work & money (4 comments total)

For very good all around discussions of the economy and investing, see The Big Picture. His postings are very eclectic, but they includes lots of discussions of how impacts from one part of the economy flow through to other parts, including the stock market. For example, he was railing about the looming mortgage meltdown about a year and a half ago.
posted by alms at 8:03 AM on September 17, 2007

You do need a basic economics understanding, what substitute goods are, how changes to supply prices affect demand etc, substitution effects, etc. A basic "economics for dummies" type book will cover the bases sufficiently here. For the "investor midset" consider: mutual fund guru Peter Lynch's One Up on Wall Street, or even Jim Cramer's Real Money. Lynch was considered by the media and investors alike as a god, and Cramer's Real Money is actually quite good, if geared a bit towards traders.

Do not waste your time with Cramer's other books.

Given your example, here's an interesting question for you to ponder: If housing doesn't go back up, the conventional wisdom has it that rental property management groups win as people shift to renting from buying. However to what extent is this offset by homeowner/speculators who can't sell houses and start to rent out these houses? Is there a business to be made by buying up busted speculator houses and turning them into a top end rental property? Or even rent-to-own?
posted by Pastabagel at 8:45 AM on September 17, 2007

Might take a look at this.

As the guy points out, there is precisely one set of causes and effects with regard to stock prices. That is the supply and the demand for stocks, and particularly the stock whose price you're interested in.

There has been a lot written about rational analysis and prediction of stock prices. Peter Lynch's books are great - I keep Beating the Street close to hand - and Benjamin Graham's Security Analysis (1940) is considered the definitive formal treatment.

One of the take homes is that stock prices don't always behave the way a rational analyst might expect them to. I've seen this phrased in about a million different ways since I started learning about this stuff. Benjamin Graham told a story about a manic-depressive guy named Mr Market who is always knocking on your door offering to buy from or sell to you a stock, in varying states of panic and frenzy. "Mr Market can remain irrational longer than you can remain solvent," we are told. CV Myers stated it a different way that I have found useful: "Never buy on news." I recommend this advice to you.

Finally, here's a blog post written yesterday that I read and nodded my head to. The Motley Fool community is full of a lot of people like you (and me) trying to learn more about these topics and I'd recommend poking your nose around there, it's generally free of the more toxic kind of stock pumping.

Jim Cramer (host of Mad Money on CNBC) is also worth listening to but it is important to understand that 99% of what he says is intended as comedy. People think that his sound effects and physical comedy such as shouting "Boo-ya" are the comic part of his schtick; but actually, if you pay attention and are tuned in to the markets, the content of his "serious" rants is just a more sophisticated form of comedy; it's really what you should be laughing at. He's well aware of this, too; his entire schtick is a satirical take on the investing/speculation game.
posted by ikkyu2 at 10:22 AM on September 17, 2007

Well that's nice, I linked that guy's blog twice. I plead pre-coffee.
posted by ikkyu2 at 10:23 AM on September 17, 2007