Seems like there should be ways, but nobody has a way.
Some infomercials claim to teach this, but of course if they really knew they wouldn’t bother with infomercials they’d just use the method themselves.
The one method that I find attractive is the contrarian, buy when everyone wants to sell. Assume that the market is not rational, but that those in it are like ducks at the park, all rushing for the last scrap of bread tossed into the air and ignoring those already on the ground.
The problem of course, even if that’s right, if the market cannot be predicted then it’s equally impossible to predict what’s opposite.
So, is playing the market a sucker bet, just good for the brokers?
Or is there going to be a way to beat it.
The stock market is more like poker than blackjack. The top X percent of poker players will consistently win the game, the bottom Y percent are going to consistently bleed cash. Blackjack, unless you figure out a way to cheat, you’re going to slowly lose your money.
Whether you can call that “predictable” sort of varies on your definition. I don’t think you could set up a model that predicts five years ahead what’s going to happen. That would be like betting who is going to win the next hand in your poker game. But, within the current hand, a good player is going to be able to predict who the winner is going to be.
The stock doesn’t have clear “hands”. Perhaps the closest you could come is business quarters, but in general a hand starts when some news or other is released. Big news = The start of a new hand. Good players are going to know whether to call or fold, and they’ll come out ahead consistently.
It’s not possible to give a very specific answer without knowing exactly what you mean by prediction. There are some trends in the market that can be exploited to make money, but not anything that you’re going to find by staring at charts. On the other hand, if you want to know whether a given stock will go up or down tomorrow, your best bet is to flip a coin.
The stock market doesn’t have to be a gamble – by buying stocks with solid fundamentals, you’ll generally come out ahead in the long run (in gambling, you always come out behind in the long run – that’s what keeps the house in business). Of course, the short run can kill you, but one important adage is “It’s time, not timing, that you need to succeed in the market.” No one can always time the market (or a stock) perfectly. But stock with strong fundamentals will earn you a good deal of money over time, especially if the stock pays regular dividends.
There’s no way to accurately predict the market, except that, over the long run, buy and hold will make you good money. It also reduces how much your broker makes. So research a stock, make sure the company is solid, keep an eye on news that might indicate it’s not, diversify your portfolio, and plan for the long run.
Any method of outperforming the indexes is either dumb luck or something indistinguishable from it. If there were any method distinguishable from luck, then eventually that method or methods would end up controlling everything in the market, and everyone would outperform the indices, which is of course impossible. Even if someone had a magical method that they could not or would not share, if it were distinguishable from luck, then people would just start doing the same thing as the fellow making the magical predictions.
I agree with you almost completely but there seems to be some exceptions. Warren Buffet is the most famous example and he has beaten the vast majority of investors spanning many decades. There is also the less strong case of computational stock market analysts that exploit some strange mathematical quirks of the stock market and make money based on those quirks. However, the average person cannot do that. They have to lay out millions of dollars in stocks to make a fairly small short-term gain day after day and the people that do it are some of the most brilliant out there. If anyone finds out how they are doing it, the whole plan is screwed forever.
It becomes a problem when the market fluctuations correlate with your guess, and you say to yourself that you knew all along. A form of ‘Gambler’s fallacy’ if you will.
Nobody can accurately predict what will happen in the market with any kind of consistency. NO ONE.
Except that every academic study of stock market performance I’ve read has failed to find the “persistence” you suggest should exist in the top performers. It doesn’t matter if you`re looking at mutual fund managers or hedge funds or whatever - top performers year to year tend to have very poor “persistence”. They’re good one year, then bad, then bad, then medium.
In other words, studies show that a fund manager beating the average for a few previous years is not a significant indicator that they will continue to out perform the average. Now you might say, of course just because a guy beats the market this year and last year it doesnt *necessarily* mean he'll beat it next year. Of course it isnt necessary. I’m saying that generally it’s not even a good predictor.
In fact, while there are a handful of fund managers who have consistently outperformed the market over many years, their existence isnt outside the limits of what youd expect purely by chance. There are thousands of actively managed funds. Even if the managers were picking stocks at random, we could expect a very small number of them to outperform the market every year for years. Like coming up heads 10 times in a row - if you`re flipping thousands of coins 10 times, a few coins will do that.
To be fair - I’m not a finance professor by any means and I stopped reading research on market performance after I graduated with my BS. It’s just my recollection that the research was fairly consistent.
To be even more fair, every study I remember reading took into account management fees. But it’s an industry built on the idea of providing better than average returns in exchange for a management fee, so I think it’s reasonable to include them.
Doesn’t the same book argue that people like Buffet are akin to winners of hypothetical coin flipping tournaments. Going in everyone has the same chance of winning and no control over the outcome, but after it’s all said and done the press will ask the winner what his secret was.
Sure, Buffet is an investor, but was he investing in the market to get where he is? Or did he buy up failing businesses and turn them profitable? I don’t think he made his money in stocks, but made money in stocks as a side effect of fixing up businesses. If Buffet traded solely in stocks all this time, I don’t think he’d be where he is now. Thus, people asking him his secret is valid and the success he has was with hard work. He is a one of a kind.
Yes, the market cannot be predicted. However, it can (and is) capable of being manipulated. Take traders like Marc Rich-by planting rumors and having dummy companies buy contracts, he was able to profit hugely in aluminum and oil.
Going further back, Joseph Kennedy was able to set up groups of people who would trade selected stocks, bidding them up, and then dumping them (“pump and dump”)-Kennedy made millions by these techniques.
Warren Buffet has made a fortune by buying stocks that have inherent value and good growth characteristics. Will his buy and hold philosophy survive the current downturn? Who knows.
Mutual funds are perhaps the greatest scams of all time unless you really like talking to people in Nigeria yet few people call them on it. They charge fees which almost assure you of making less than you would have made if you would have simply invested in an an index fund. You don’t have to try to “beat” the market, you just need to match it which is what the various index funds are for.
Warren Buffet makes his money through mergers and leveraged buyouts, not stock trades.
This is a case of legal “insider information” because he often knows what the plan is when neither the merger partners nor the bankrollers know how the deal will be structured.
No. In the general sense laymen use the term, the stock market cannot be predicted in the sense of some guy with a “system” coming in and consistantly beating the odds.
It’s all about probability and risk. Individual stocks represent actual companies. So if you want to try and figure out whether the value of a stock is going to increase, you can attempt to determine the value of a company and evaluate whether it is trading at, above or below its true value and whether or not that company will continue to grow. Discounted cash flow valuations, P/E ratio analysis and comparisons against other companies in the same industry are just some of the methods used. That’s what long term investors do.
You can’t predict what will happen in the future though. The CEO could get caught committing fraud, some other company might develop some disruptive technology that renders the company’s product obsolete. So one way to mitigate these risks is to invest in a basket of companies. You may even hedge your investment by investing in companies that are counter cyclical.
Traders, OTOH, don’t invest long term. They trade short term (usually closing out their positions on the same day) in hopes of taking advantage of volatility (ups and downs) in the market. They try to make predictions using “technical analysis” or IOW identifying patterns in the charts (ie “head and shoulders”. This is generally considered psuedoscience as multiple traders can look at the same charts but find completely different results.
I make my living as a trader, so this topic is definitely interesting to me.
I am aware of the general agreement within academia that beating the market can’t be done consistently. But then I’m also aware of the hundreds of people I see walking around the south loop in Chicago that make their livings trading the markets. Something doesn’t add up. I am absolutely positive that there are inefficiencies in markets. The people that recognize them and are able to trade them are the ones that make money. As more people catch on, the “edge” goes away. It’s a constant struggle to stay ahead of the curve. The fact that most studies find, on average, people can’t beat the market doesn’t bug me. I would expect that.
Maybe you can explain it to us then. How exactly do traders make their money? Some of these guys I know are MIT Phds while others are dumb guidos they pull in from Long Island. So I have to wonder how much is dumb luck and how much is actually recognizing those inefficiencies.