Are Stock Market Predictions Possible?

Even the top financial gurus have not mastered stock market predictions with any consistency. Despite much research and development, there is no software or formula in existence that can consistently predict the market or the performance of individual stocks. It just hasn't been invented, with no lack of trying.

Stock Prediction Hindsight is 20:20. The only way to truly understand market behavior is through the use of hindsight.

However, what is understood on one day about how the market reacted to its environment can never be applied again. No day is ever the same as another, and the many moving parts of world news make it impossible to make stock market predictions on another day.

If you were somehow able to look at stock price movements and real-time news clips side by side, you could see how the market (and individual stocks) shake off information that you would think is important, and become extremely volatile over information that seems trivial.

No one has ever been able to read the mind of the market - until it is too late.

What About Professionals? Financial advisers and money managers stir up enthusiasm and sales based on impressive past performance.

But past fortune at beating the market is rarely repeated. So if you weren't invested with that advisor during their impressive "run up," you've probably already missed the boat. It's somebody else's turn to get lucky by then.

As Michael Edesess said best about the issue of stock market predictions in The Big Investment Lie:

The Coastline Analogy. Edesses uses the analogy of a coastline to illustrate how unpredictable the stock market is. If you take a sheet of paper and place it over a map so that you can see the coastline, try moving the paper slowly up the coast (assuming it runs South to North) and see whether you can predict in which direction it will move next.

Even if you know the ultimate curve of the coastline, you won't be able to predict the slight movements with any consistency.

It's the same with stock market predictions. Like the jagged coastline, any market trend that you think you recognize on one day could turn against you the next.

So How Should I Invest in Securities? When someone comes to me with a question about investing in securities, I of course first ask my opportunity cost-based questions.

After that, my "Edesess-speak" emerges. Here are four of his important principles from The Big Investment Lie:

• Don't pay investment managers and advisers to invest your money for you because any accidental gains will likely be wiped out, and any losses deepened, once their fees are calculated

• Recognize that different securities products are really very similar and interchangeable, except for risk - so researching them on your own is not as complicated as it seems

• Invest in true low-cost index funds that are broadly diversified through as many industry segments as possible among domestic, international and liquid real estate markets (REITs)

• Run away from hedge funds as fast as you can (they only make the advisers rich)

Next: The Truth About Mutual Funds

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