Why I Don’t Try to Forecast the Stock Market

I stumbled onto this article today, and it made me so glad that my job does not involve trying to predict the stock market.

Written in February of this year, the headline reads: “Financial Stocks: The Stars of 2008?”


PedroCMS

Responding to my fellow colleagues #9 and #12:

You're both right, the stock market is unpredictable and often, too overwhelming to keep track of. But do you really think wealthy stock investors base their luck on the random walk theory?

The answer is obviously no. Warren Buffet, the stock market guru of today states that in order for you to learn how to invest in the stock market, you need to first look at the company and study it inside out.

As Warren Buffett stated on CNBC the other day...

" I got a formula that says bet on brains when it is the the right type of deal. The price was right. The terms were right. The people were right. I decided to write a check."

Read More...

http://seekingalpha.com/article/97228-warren-buffett-on-goldman-sachs-and-the-financial-bailout-package

sarahCMS

The title of this article is very interesting, since the author's purpose is to inform us something which is very true. Stock market value can't be predicated. They can make you dizzier than a roller coaster, since they alway go up and down, and trying to guess their next move is just useless. One of the main causes that stock market values are so unpredictable, is because we have no control over the future. For example, 9/11, no one could have ever predicted such tragedy, therefore there are no ways to be certain of the stock market values.

Is something in which you have to take your chances, a risk, and pray that you end up successfully.

Lee

Over the weekend, while having beer and watching football, my friends mentioned that the blame can be placed on NASA for not having enough jobs for PhDs who channeled their talents into creating swaps and derivatives. Another one said that there is not enough war to use all these talents in designing missiles and bombs so they created the financial version. It may sound like drunken talk but think about it.

dave

NASA had the jobs but could not match the bucks.

Jose, putting money anywhere is not 100% secure. The FDIC is paying off today, but it is not hard to envision a scenario where they cover accounts for .50 on the dollar in 18 months. US govt default is implausible, improbable, but not impossible.

JoseAngelCMS

Predicting the exact value of a stock before one buys it, or at least know if the stock will go up is just like trying to figure out what your opponent's hand is, in a poker game. Predicting the future value of stocks is just like gambling.

Even though people can try to analyze the data to predict the future value of stocks, putting money in the stock market is never a 100% secure thing to do. Today, for example, there is no way to know what the stocks will be worth in the future. All stocks are bumping up and down all the time, and some businesses are actually going out of business.

Even though if people are able to make lots of money now if they are lucky, they might as well loose a lot of money.

Mike

It's not a bad profession when you consider that you only have to be right a few times to make a lot of money... and there's really no downside to being wrong.

Paul K

Karl @4, the problem with the mark to market rules is that the penalty for it being stated too high is high and there is no penalty for it being low. Since it is hard to be sure of FMV during downturns, many holders of the loan packages are forced to write them down simply because they cannot show the value. That is, you can only use informed guesswork (such as average percentage of defaults, etc). The problem with the more exotic loans and subprimes is that there is not even any history to use, so the guesswork is just that and they tend to go very low, thereby destroying the asset base they normally borrow against, and that stops rollovers of short term loans. This avalanche effect then kills off lending and buying up of new loan packages and the system freezes up.

Ticia

Some people are better at prediction...

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=

Karl

The SEC has just decided that the problem we are facing is caused by too realistic valuations on mark to market.

So, they will help "fix" this crisis by relaxing the rules on companies reporting the fair market value of their assets.

Of course, the problem was caused by unrealistic estimations of the ability of the customers to pay back the loans, combined with an over valuation of real estate.

Keep it up, Your doing great, Brownie!

hal

As a journalist, you ought to be familiar with the disconnect between headlines and articles. Deep in the article are two telling facts. The stock picker is 70% invested overseas, and the prediction is that US financials will robustly return within the next 36 months. Ergo, he did not lose any more shirt with recent events in US financials, and he's got 29 more months of "deadline" before the US market is back. Not an unreasonable prediction given the numbers of investors ready to jump back in and surf the bailout when it happens. (Oh yeah, it WILL happen. Congress has never stopped listening to the money men, except in the 45 days preceding an election.)

Paul K

But Steven, the beauty of predictions is that most forget you made them, so you tout when you were right and "forget" when you were wrong. That is why so many claim to have predicted the outcomes correctly - they just neglect to mention all the times they were wrong.

The bearish ones are even better. You say that stocks will tumble in Jan each year. By the end of the year, you pick the period that had the largest drop (maybe just a day) and say that is what you meant. Always right!

Robin

Technically they are the stars of 2008, just not as the author intended. :)

kevin

The interesting point to me is that back in February 2008, the market had already knocked off a huge part of the value of companies in the mortgage business and even generally in financial services. The market thought (and I certainly did, too) that a typical pullback was occurring. The surprise this summer and fall, therefore, wasn't that financial stocks were overpriced, but that the market had not already wrung out the excess value the significant decline that had occurred.

Michae Parish

The reason you cannot predict the market or any of the stocks in it is because there is no correlation between the value placed on that piece of paper called a stock certificate and the earnings of those companies. You are not investing, you are gambling. Since you do not get a piece of the earning from the majority of companies how can you possible put a value on that piece of paper. It's the next sucker rule. You make money if the next guy is wiling to pay more than you did for that piece of paper. In and of itself it has no value whatsoever. It's just like playing a game of chairs. Sooner of later their is the guys who cannot find a chair to sit down on.

Guys like Buffet don't buy stocks, they buy companies! The super rich also do not invest very much in the stock market unless they have inside information. They also invest in companies, hard assets and invest in an owners share of a company they think that will do well.

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stock market

It’s the next sucker rule. You make money if the next guy is wiling to pay more than you did for that piece of paper.