Every day we see articles in the press and
hear the pundits on television telling us why the stock
market did something. But it is always about why it did
it yesterday. Why it went up, or down, yesterday. Or last
week. Or last year.
Rarely about what it is going to do tomorrow.
Or next week. Or next year. Not even over the next minute.
And when they do make such forecasts, we would be wise to
Why? Because no one can make these types of
Here are a few comments I read recently. “Investors
are not focusing on what companies are reporting now, but
on their outlook.” “Stocks rose sharply on Wednesday
as investors bet the U.S. economic recovery is picking up
This is like saying that it took me less time
to get to the office today because I had fewer red lights.
Could I forecast that I was going to get fewer
red lights? No. Or in the stock market, could I have forecast
that investors are now going to focus more on the outlook
of company reports? No. How would I even know that they
were doing this? And if I did, would this tell me what the
market was going to do? No.
Could I have forecast that investors will
start betting that “the U.S. economic recovery is
picking up steam”? Of course not.
We are very wise after the event. We can easily
invent reasons for past events. We can speak oh so knowledgeably
about past market behavior.
The seduction of this is that we start to
think we can apply these reasons to the future. We are led
into thinking that we know what we are talking about when
it comes to future directions of the market.
Even worse, we think that the newspaper writers
who rabbit on about these things know what they are talking
Well, actually, there is something worse.
“Investing” your money based on these articles.
“I never attempt to make money on the
stock market.” Buffett said back in 1983. And Buffett
loves making money. If he is not trying to predict what
the market is going to do, we can be confident that he does
not believe that it can be done.
Continuing, he explained his attitude towards
the market. “I buy on the assumption that they could
close the market the next day and not reopen it for five
In the short term, Benjamin Graham explained
back in 1934, the market is driven “by artificial
manipulation or distorted by psychological excesses”.
The great economist John Maynard Keynes expressed
similar views. He did not try to figure out what the market
was going to do. He focused on “a careful selection
of a few companies having regard to their probable actual
and potential intrinsic value over a period of years ahead
and in relation to alternative investments at the time.”
Most market commentators spend their lives
looking in the rear-view mirror. Yet they write as if this
gives them a clear view of the road ahead. If you want to
avoid being another market casualty, don’t be one
of their passengers. And don’t invest that way yourself.
There are two other major dangers of reading
too may articles by market commentators. The first is that
you might begin to think that we can compare the stock market
to a physical system. This is implied through comments such
as “the Australian dollar is losing momentum”
Cars have momentum. Planets have momentum.
The price of stocks does not have momentum. There is no
evidence, for example, that if the price of a stock goes
up four days in row that it will go up on the fifth day.
The second danger is thinking that asset prices
are living entities. I read recently that “the dollar
is wallowing and looking for a direction.” This sort
of writing can subtly lead you into thinking that all you
have to do is study the asset prices looking for its habits
and behavioral patterns.
Just a turn of speech you say. Perhaps. I
am not so sure. In any case, finding quality stocks at attractive
prices is tough enough. It makes things even tougher when
it is muddled with a writing style that deliberately blurs
the distinction between an asset price and a pig in a mud
Successful investing, as opposed to speculation,
requires the careful selection of quality companies selling
at attractive prices. This is the core of my software Conscious
Investor. Scanning through thousands of stocks looking for
those key companies that are likely to make you money year