Is it possible to predict movements in the stock market?
Today, I was asked to go on Alberta Primetime, a TV show on access TV to comment about some market predictions from an article published in the Globe and Mail. The article provides some interesting statistics on why the market may be ready for a correction but do we really care?
Pundits, Gurus and experts go to great lengths to try to either try to predict the stock market or they try to at least explain the stock markets with a myriad of theories. I try to read as much as I can and what I have found is there are more theories and explanations than ever preserved by the world wide web.
I thought it would be relevant to share some of my global thoughts on the stock market and why predicting the markets is a real waste of time.
Stock markets go up and stock markets go down
Why do stock marketsgo up and down? Because the market is a place where buyers and sellers converge. When there are more buyers than sellers, the price increases. When there are more sellers than buyers, the price decreases. So what causes people to buy and sell? I believe it has more to do with emotion than logic. Because emotion is unpredictable, stock market movements will be unpredictable. It’s futile to try to predict where markets are going. They are designed to be unpredictable.
A waste of time
Spending an hour trying to predict the future movement of the stock market is an hour wasted in your life. There are so many better things to do with your time. Now, don’t confuse this with knowledge. I think it’s good to read and learn but don’t think you can predict the markets.
Markets are more volatile than ever
Mark Twain once said “October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.” Markets are more volatile than ever simply because of more access to information and more resources to react to that information. Technology allows us to buy and sell as many times as we want, whenever we want while sitting on the toilet from the comforts of our own home.
Perfection does not exist
There is no such thing as perfection when it comes to investing. Many times, I’ve said that investing is not about perfection but rather about process and probability. The key to success is to develop a process or a plan that attempts to increase your probability of being right more often than wrong (because you will be wrong sometimes) and enhances the probability of making money more often than losing money (because you will lose money from time to time).
Related article: The three Ps of investing
Everything goes in cycles
The stock market just like everything else, runs on cycles. What goes up comes down and what goes down comes up. What goes up the most can come down the most and vice versa. After every bear comes a bull. After every bull comes a bear. After every correction comes a recovery.
Unfortunately for all of us, the stock market is unpredictable and uncontrollable. That’s exactly why it can be so frustrating for so many people. The market can also be a sea of opportunity to make money as long as you employ smart prudent investment strategies. Don’t get caught up in thinking the stock market can be your secret way to get from rags to riches. That kind of speculation is about as risky as the casino or lottery and we know the odds of winning at that game.
Some people will argue that if it’s too hot in the kitchen, then get out but also know the consequence of getting out . . . there’s not much for alternatives. Others seek safety within the market but I think it’s best to find safety outside the market.
Comments
Jim:
We are in 100 percent agreement that it is a waste of time spending even one hour trying to predict where stock prices are headed this year.
But even your own article suggests that long-term predictions work. You say: “After every bull comes a bear.” If that’s so, then the odds of getting a good return are much higher in a bear (when prices will soon be going up) than they are in a bull (when prices will soon be going down).
Getting the odds on your side makes a big difference. Stock returns cannot be predicted with precision even in the long-term and stock returns cannot be predicted in the short term at all. But it is too broad a statement to say that stock returns cannot be predicted. Long-term returns are highly predictable for those willing to take prices into account before buying.
Or at least so Rob Bennett believes!
Rob
Rob, you are an inspiration.
aww that was adorable!?
You really could not be more wrong. The stock market is absolutely predictable. You stated in your rant that the market revolves around human emotions. Human emotions are based on human nature which hasn’t changed since we “fell out of the trees”. I challenge you to do your research by reading a book or two. I am confident that you will see the error in your words after doing this. Your rant has turned many people off of the opportunities presented by the market everyday. One of these persons could have been one of the millionaires that the stock market makes every day.
Hi Bart
Delighted to see your confident post and comment that market is predictable.
I am a market student but never come across enlightnment of this sort, however hard i try.
but its good to know that there is someone who knows how this works.
Bart, please cite your sources. Who are these “millionaires that the stock market makes every day”? And please don’t reference Warren Buffett. He does not try to time the markets and discourages anyone from attempting to do so.
Everyone should be invested in the stock markets under the guidance of an honest investment professional who is focused on long-term goals. This takes time and discipline, not prediction of stock prices.
You can cite every book and article ever written about stock prediction but the proof is in the pudding. For me, it boils down to the following quotes:
“I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.” —Peter Lynch
“It must be apparent to intelligent investors that if anyone possessed the ability to do so [forecast the immediate trend of stock prices] consistently and accurately he would become a billionaire so quickly he would not find it necessary to sell his stock market guesses to the general public.” —David Babson
Please provide REPUTABLE sources for this predictable market, because all the stock market moguls will say otherwise.Even a recent Harford Business School research project found that markets are highly unpredictable. That study even concluded, after reviewing market data for the last 100 years that no significant market movement could be correlated to human emotion or news cycles.
I am glad to read your post here…Its a very helpful for me in stock market work.Thanks a lot..
If you people honestly think that these market predictions are justified by your willingness to do research I think you all may have lost your minds.
What Jim is saying is that the market is driven by endless counts of emotion and as well as ego. It is ultimately a vegas wasteland without the shiny lights and automated waterfalls.
You are, in the grand spectrum, gambling, expect with portfolios.
Human emotions are so subjective, therefore nitpicking at all these elements and trying to derive a prediction is senseless.
Let the bidding commence!
Prediction of stock market trends is possible within borders. You don’t have to think in absolute terms like today to stock price is 80 Euro/USD and tomorrow the calculation turned out that the price is 81,342 Euro/USD . Thats in fact not possible. But with advanced mathematical datamining methods like Support Vector Machines, Random Forest Trees or Recurrent Neural Networks, you are able to find patterns in historic price development that tells you, if it is more likely that the price for a stock is rising or falling within the next days. through this more statistical approach you can generate a lot profit up to 50% in 6 month. This system works buying and selling stocks in short cycles that I would call **medium frequency trading**
I have just developed such a system (computer program) thats works pretty fine.
If you need more information don’t hesitate to contact my
[email protected]
Best Regards from Germany
Rainer-Michael Werner
Rainer-Michael Werner, I very seriously doubt you know something that nobody else knows. If you had developed a system to consistently achieve a 50% rate of return over a 6 month period, you would now be so fabulously wealthy that you wouldn’t find it necessary to sell your system to people on the internet. In fact, it would be against your interests to sell it. If everyone had this magic system, then everyone would behave the same in the market and the opportunities for you to gain would dry up.
Hi Jim,
I don’t want to sell my system over the internet. Thats not possible. Let’s say I know something that very few people knows because they don’t have this mathematical and information technology background, but big Banks know this too. The do also Algo-Trading based on mathematical classification algorithms.
Best Regards
Michael
Well, I saw how these so called genius mathematicians anticipated what happened in 2008. Whether traders or risk analysts, none saw it coming whether regarding the crisis or even regarding Madoff.
They also created their own software to anticipate markets movements. The truth is that market movements can’t be anticipated by maths, cause it is not an exact science.
You cannot include in your computer program all possible vectors such as earthquake, future political developments, global panic on the stock exchange, etc.
It is why mathematics never works for anticipating stock market movements !
As for “big Banks know this too”, we saw this in 2008 when most of them were saved by States or got bankrupted, despit their armies of mathematicians, supper computers and super developed software !
At first, I was a skeptic myself but after a few years of reading and researching, I found out that markets CAN be predicted.
However, accurate market prediction is a rare commodity. That is why once you find someone who is good at it, you’d better hang on to them and never let go because the difference they make in your investing returns can be huge and I am talking from experience here!
The one company that I have been following for some time now is incidentally a Canadian company called Markets Compass (marketscompass.com) and their accuracy in predicting market movement honestly continues to freak me out.
Please do not consider this an endorsement of this company or any other company for that matter, but I just wanted to share my personal experience on this subject in here because some people quickly dismiss whatever they do not understand as impossible!
Magic software that is predicting stock prices does not exist. What you are looking for is software that does this job just a littlebit better then the rest. Even 1% better prediction can give you just this margin to make more profit. Mega AI Predictor does a good job as far as predicting this kind of chaotic data is possible: http://www.gimespace.com/products/mega-ai-predictor