Everyone loves stock market predictions! The idea of predicting the market is a big favourite amongst new retail investors and traders. Watching your favourite stock market expert giving his/her prediction about the future of the market is very entertaining to listen to or watch. A crazy prediction such as the stock market will increase four times in the next 5 years or a prediction such as the stock market will crash in the next 6 months gets a lot of TV ratings and views. But a lot of times, these experts are wrong and the prediction turns out to be false! So, this begs the question – Can anyone predict the stock market?
The short answer is – Nobody can predict the stock market! Even the biggest investors make mistakes in the stock market and cannot predict the future. There are multiple reasons why it is impossible to predict the stock market.
1. Stock market is very complex
The stock market is a very complex place. It contains stock traders who buy stocks for a short duration to make a quick profit & it also contains value investors who buy undervalued stocks for the long term. It contains savvy investors with years of experience and complete amateurs who have just entered the stock market. There are many people who only buy shares based on the fundamentals of the company while there are many people who are complete speculators. This complex mixture can make stock markets very hard (almost impossible) to predict because the behaviour of the different types of people involved in the stock market is impossible to predict.
2. Markets can be very irrational for a very long time
Famous economist John Maynard Keynes once said “The stock can remain irrational longer than you can remain solvent.” This is because the stock markets can behave in a very strange manner and seem to defy any logic! Let’s suppose a company has posted amazing quarterly results. The logical person would assume that the stock price should go up. It makes a lot of sense that the stock price increases when the company performs well in their quarterly results. But many times the stock market does the exact opposite and the stock price falls.
On the other hand, if the Indian GDP is declining, then the natural expectation would be that the stock markets would fall. But sometimes the rally starts as soon as the data is made public. The stock market can defy all logic and crush all expectations which the people have from the stock market.
3. Stock Market is always forward looking
Stock markets of every single country have something in common – they are all forward looking. This means that the stock market always tries to move ahead of the economy of the country. If the company results are supposed to be amazing in the next quarter, the stock can start moving right away (much earlier than the actual results). If the GDP growth of the country is going to improve, then the stock markets will start their bull run even before the GDP growth is visible.
This is also one of the reasons the stock markets sometimes don’t seem to make any sense. A complete despair in the economy can lead to a stock market rally if the market expects that things will improve in the future. Most analysts look at the current fundamentals and try to correlate with the stock market behaviour, only to be left scratching their heads in disbelief!
4. Stock do not move based on fundamentals
Despite popular belief amongst retail investors, the stock market doesn’t move based on fundamentals of the companies. The stock market moves on a simple concept of supply and demand. If there are enough people who are willing to buy stocks at a premium, the stock market can keep on rallying even if the fundamentals of the companies are terrible. On the other hand, if everyone wants to sell then the stock price will crash. It doesn’t really matter if the company is undervalued or not! This can cause price fluctuations especially in the short term which can make any prediction about the stock market impossible. To learn more about why stocks don’t move based on fundamentals, visit this article!
5. Sudden unforeseen events
Sometimes things happen which are outside the control of any company or the government of any country. There can be a sudden declaration of war by any country. Or a sudden terrorist attack. Or sometimes even a pandemic such as the 2020 Coronavirus pandemic. Nobody can predict if such events will happen in the future. These events cause extreme fear in the stock market causing sudden crashes. Since these events are impossible to predict, the stock market is also impossible to predict!
Now you might be thinking, if the stock market is impossible to predict then why even bother to learn about the stock market? Since the stock market is irrational, how can somebody invest in the stock market in a rational manner?
Just because it is impossible to predict the stock market, doesn’t mean it is useless to study about it! Instead of predicting the stock market, we can take a calculated bet when investing in the stock market. Most successful investors analyze the stock market instead of predicting it!
There are some key points which can be used to make smart decision while investing –
- The stock markets may be irrational in the short term but they align with the fundamentals over a long period of time.
- The stock markets tend to go up over the long term. So when everything seems lost, it is the best time to invest in the stock market.
- When there is complete euphoria in the stock market about a particular stock, it is better to exit the stock.
Avoiding common mistakes can make our investing journey successful without needing any stock market predictions. To learn more about the common mistakes which retail investors make, visit this article!
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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