The S&P 500 fell 6% from August 17 to August 31 – dropping as much as 11% at the bottom. August 24 was the best day for rational investors, with all the big stock indexes down 4% in a single trading session.

One colleague forwarded me a news article saying that the culprits on August 24 were big, computerized stock-trading firms all selling at once.

When markets fall a little, those big computers are programmed to sell a lot. Every now and then, all the computer-driven traders find themselves doing the same thing. And the mass selling creates days like August 24.

Or so they tell me. Who knows what those money-managing computer geniuses are really up to. But if the article is right, I pray they don't change what they're doing...

According to Dominique Dassault of GlobalSlant, all these computer models will blow up one day.

In her June 19 blog post, Dassault wrote (emphasis added)...

While in Greenwich Ct. one afternoon, I will never forget a conversation I had with a leading quantitative portfolio manager... The real challenge, for him, was to "sniff out" the degrading model prior to its inevitable "BLOW UP". And I quote his humble, resolute observation: "because, you know, eventually they ALL blow up"...

The "degrading model" refers to the computer models used by sophisticated (but blow-up-able) trading firms. With any luck, those firms will do business as usual for another couple months, and stocks will fall even more.

You see, when know-nothings – sophisticated and otherwise – blow themselves up, it's great for you and me. Forced selling unrelated to fundamental value is one of the all-time great setups for big returns in publicly traded securities. That's what happened on August 24 (or so we're told).

Remember, no matter how much trading is done by computers, stocks aren't lottery tickets. They're fractional ownership interests in real businesses, run by real people.

As far as I'm concerned... cry havoc, and let slip the blowups!

Falling markets are good because they make stocks cheap enough to recommend buying.

If the computer models (or whoever) keep selling and the S&P 500 falls 20% from its May 20 high (2,132), the words "bear market" and "volatility" will be published online dozens of times per hour and repeated 100 times a day by every talking head on CNBC and Fox Business News.

This will make many great businesses trade for cheaper prices – which, as regular readers know, is the strategy we use in Extreme Value.

Bottom line: Don't be afraid of the stock market. Be ready to exploit it when everyone else is acting irrationally.

Good investing,

Dan Ferris

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

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