The marketplace is nothing but a reflection of “collective wisdom” on the prospects of the underlying assets that make up the market. As the market is always forward-looking the economy, stock prices at any point in time would have already discounted (factored in) the prospects (i.e. good earnings, revenue growth, sector expansion) of a stock. This suggests that investors do not have an upper hand over other market participants to capitalize on an investment arbitrage. However, this only holds true if you subscribe to the Efficient Market Hypothesis (EMH). The EMH opposes the concept of Value Investing (one of the investing styles used at CapitalistLAD). This article will not attempt to explain which school of thought holds true, but rather highlight another driver of the market – random irrational behavior.
We could all agree that no fancy theory could best explain how the market moves or behave in any one day. Financial media and “analyst” may have you believe that they have more information than you do, but do they really? My countless hours sitting in front of financial news when I first started out as a rookie investor have led me to realize that these analysts on TV are providing nothing but an intelligent guess. They also like to harness the “attribution theory” – explaining how the Dow Jones fell 200 points due to concerns over some geo-political event remotely relating to United States. Nobody can determine with certainty the correlation between market movement and news events surrounding the market. More often than they realize, analysts are prone to commit the fallacy of association is causation (In Latin: Post-hoc ergo propter hoc). Nobody really knows where the market will go tomorrow, and why.
My personal stand remains – market movements, up ,down or sideways are largely random. It is impossible to accurately pick out a single factor that is responsible for any market behavior because a myriad of variables are constantly getting priced into the market at any one time. Do you now understand why sometimes the Dow Jones can fall by more than 100 points even on good Non-farm Payroll data? The market could move in the direction we expect it to move based on the data released, but it doesn’t have to. While we can identify certain repetitive price behavior around areas known “key levels” or zones of “demand” and “supply”, the market can invalidate such zones and move unpredictably towards either direction. With that being said, I do not fully subscribe to the efficient market hypothesis. There are still stocks available on the market that trade at a discount to its intrinsic value. Sadly, these “undervalued stocks” are getting lesser by the day. Warren Buffett himself said that there is little value in today’s market. He advocates passive index investing (we will explain this strategy in the another article).
In a sea of financial information, it is no surprise that an individual starting out on the investment journey would be bombarded with a truckload of information, which can be very misleading. The authors at CapitalistLAD recommend that you pick up one investment style that suits your personality, risk profile and time horizon. We would also like to remind you that this is not a place for a “get-rich-quick” fix. If done correctly, the stock market is a great place to build long-term wealth over time. So DO NOT be convinced by those “investors” you see on Instagram making $1,000/day boasting lavish lives. If it’s too good to be true, it probably is.
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Till next week, have a good weekend!