The Cloudy Crystal Ball, Part 1

“If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market.” – Benjamin Graham.

“Is this a good time to invest?” Inevitably, whenever I’ve met someone for the first time and she learns that I’m a financial advisor and investment manager that is one of the two questions I am asked. Sometimes, often depending on the state of the economy, that question may be raised even before the “how do you do” pleasantries. And if it’s not that particular question, it’s the other perennial favorite, “What do you think of the market?”

My answer to the first question is, “Yes. It’s always a good time to invest, but it depends.” By that, I mean that I have no way to predict whether the market will go up or down or even sideways in the short term. But, over the long term, I am utterly convinced that investors in the equity or stock market will be well rewarded.

By “it depends” I’m not being obscure or hedging my bets. The fact is, only your individual circumstances can determine whether a long-term investment in the stock market makes sense. Your portfolio makeup should be based on your individual goals, and your willingness, ability, and the degree to which you need to take risk. Entry into the equity market should not be dependent on a prediction of the short-term direction of equity prices.

Predicting Stock Prices

No one can accurately and consistently predict the short term direction of the stock, bond, oil or any other market, for that matter. But that doesn’t stop them from trying to, whether as a professional or merely as a hobbyist. The fact is, being an economist, mutual fund manager, market strategist or stock broker doesn’t confer clairvoyance.

Yet, within almost every issue of The Wall Street Journal, Barron’s, The New York Times or Money Magazine there is at least one article discussing recent stock market occurrences, both good and bad, and why that trend will or won’t continue. Frequently, so-called experts will be called upon for a quote, one from either side of an issue. One will say something like, “The dollar is definitely in a strong upward trend,” while the other remarks, “The dollar’s strength is expected to be short-lived.”

These contradictory opinions make perfect sense. In every transaction, there is always a buyer and a seller. Each market participant believes that his or her decision is the right one. The market sorts out these thousands and thousands of opinions and arrives at a price that reflects the best accumulated knowledge at that time. As facts and factors change, and as opinions change, then stock prices change.

The real question is, “Can anyone predict these changes on a regular basis?” My answer is, “No.”

To be continued…