Stocks and "the market"

[dennis thompson]

Why do people keep predicting what " the market" will do for the next year. I would bet that none of these market predictions for 2019 was for a 30% gain , yet this week Barrons has their annual roundtable in which market experts make their predictions for 2020, why?
The only good answer to the question : what do you think the market will do this year?, was a response by Michael Price, a billionaire investor, " I have no idea what the market will do, all I do is try to pick good stocks" Brilliant!

[roger wiegand]

People who make those predictions make lots of money from them, even more when they convince people to churn their portfolios based on their predictions. There's a lot of money to be made by making these predictions, about 90% of the "financial advisor" business is based on convincing investors that you have knowledge that no one else does or that you are smarter than the other guys.

The more interesting question is why, in the face of compelling data to the contrary, do people seek out, believe, and pay for such predictions? The number of actively managed mutual funds that consistently outperform their relevant market index is approximately zero, yet such funds dominate the market. (Yes everyone has their anecdote about how some fund tripled in one year when the market went bad, and all of those people seem to assume that they will pick that fund this time rather than the other 10,000 that will tank along with the market.

I think it comes down to most people being much more interested in and compelled by a good story than by data. Seems to be how humans are wired.

[Dave Anderson NH]

Roger, you are truly cynical. Unfortunately you are also correct.

[Stan Calow]

Just like astrology, the desire to believe outweighs the evidence.

[Mike Henderson]

People who make those predictions make lots of money from them, even more when they convince people to churn their portfolios based on their predictions. There's a lot of money to be made by making these predictions, about 90% of the "financial advisor" business is based on convincing investors that you have knowledge that no one else does or that you are smarter than the other guys.

The more interesting question is why, in the face of compelling data to the contrary, do people seek out, believe, and pay for such predictions? The number of actively managed mutual funds that consistently outperform their relevant market index is approximately zero, yet such funds dominate the market. (Yes everyone has their anecdote about how some fund tripled in one year when the market went bad, and all of those people seem to assume that they will pick that fund this time rather than the other 10,000 that will tank along with the market.

I think it comes down to most people being much more interested in and compelled by a good story than by data. Seems to be how humans are wired.

It's the same thing with gamblers. They also only talk about when they won and never seem to remember their losses. But it's impossible to beat the odds - if you play against the house you're going to lose long term.

Poker seems to be the exception because it's a game of skill and not just odds (until you run into a better player). But craps, roulette, blackjack, etc. are long term losers.

Mike

[Bruce Wrenn]

All these gains are "paper gains," unless you sell at the high point. They can evaporate in less than minute, kinda like frost when the sun comes up.

[Jerome Stanek]

If the stock goes up and people start to sell it will go down so you have to be one of the first to sell.

[Ron Citerone]

I think predictions are used for stock pickers to get their names out there. Jack Bogle is one of my few hero's!!

[Jerome Stanek]

I always wondered why these so called experts are not billionaires and not having to charge for their advice

[Mike Henderson]

I always wondered why these so called experts are not billionaires and not having to charge for their advice

Yeah, that's a good question: "If you're so smart, why ain't you rich?"

Mike

[Jim Koepke]

I always wondered why these so called experts are not billionaires and not having to charge for their advice

Yeah, that's a good question: "If you're so smart, why ain't you rich?"

Mike

Some of the best experts did become billionaires or at least very wealthy. Most of them had the same prediction on the market, "it will fluctuate." This is often credited to J.P. Morgan > https://quoteinvestigator.com/2013/0...ket-fluctuate/

It seems a lot of financial thinkers saw this as obvious. Like surfing, it is how you ride the waves.

J.P. Morgan made a lot of money during the civil war by selling the Army defective rifles > https://www.history.co.uk/biographies/j-p-morgan

Morgan escapes military service during the Civil War by paying $300 to a substitute to fight for him. During the war he buys five thousand rifles at $3.50 each and sells them on at $22 apiece. The rifles are defective and some shoot off the thumbs of the soldiers firing them. Later, a congressional committee notes this but a federal judge upholds the deal and Morgan is exonerated.

One test when looking for brokers or advisers for financial purposes is not to look at their home or car, look at the homes and cars of their clients.

jtk

[Dominik Dudkiewicz]

It's just funny that the performance of stocks is now more important to those in power than the performance of the actual underlying economy. The stock market now drives economic policy rather than reacting to it. Somethings gotta give.

[Ron Citerone]

It's just funny that the performance of stocks is now more important to those in power than the performance of the actual underlying economy. The stock market now drives economic policy rather than reacting to it. Somethings gotta give.

The stock market is one thing that many people relate to because they have stocks in their 401k’s. IMO it is not a great overall indicator because it is driven by emotion in the short term. In the long term it is pretty rational I suppose. A friend who spent his life managing money says most people by and sell at the wrong time driven by greed and fear.

[Roger Feeley]

I always wondered why these so called experts are not billionaires and not having to charge for their advice

Jerome, You hit the nail on the head.

Imagine that you have a trading system that works. You can magically pick stocks that will go up, buy those stocks, then predict when to sell. The absolute last thing you should do is market your system. You should keep it a secret and use it to become wealthy. If you sell it, everyone will use it and then their transactions will eventually nullify the system.

In the real world, I knew of a guy who had a system that worked. He had, I believe, advanced degrees in Computer Science and Mathematics. His system involved high speed trading to exploit momentary price differences between exchanges. He grew into a very small company in Kansas City and hired a few top programmers away from us. They reported back that it was a bit like crewing a pirate ship. At the end of each day, the company would cash out it's portfolio. If there was a profit, it would be split among the owner and employees. If there was a loss, the owner ate it. They never knew from day to day what their pay would be. Additionally, they were essentially evaluated on a daily basis. At the end of the day, the owner could tell anyone not to come in anymore.

In order to make their system worked, they needed extremely high speed ticker information from the various stock exchanges. Nanoseconds mattered. They built that system and then the tail began to wag the dog. They never revealed or marketed the original trading system. But they did offer up the high speed quotes to others in the high speed trading industry. Then they started making markets which is allowing their users to trade with each other. That gave birth to the "Better Alternative Trading System" or BATS for short. BATS eventually because the 4th largest stock exchange in the world.

Two of the best programmers I ever worked with helped build BATS. Joe Ratterman and his brother Phil are both amazing talents and really great guys. I think Joe has sort of stepped back from day to day operations and does something with Angel Flights. Phil is an avid rock climber and has opened up a rock climbing gym in the KC area someplace.

[Tim Otto]

Market gains are still "paper gains" since they are denominated in USD, a fiat currency since 1971. Until the fiat is exchanged for something useful and real, like a new (old) planer, tools, firearms, etc., even gold and silver (as a store of value), you still have nothing but a string of 1's and 0's in cyberspace.

Buy low, sell high, collect early, pay late ... works every time.