Predicting Market Prices Is Simply Trying To Predict Market Phycology

“Davidson” submits:

Market predictions! Everyone has one. So many predictions that the media will always find someone to tout at any point in time they can label as ‘correct’. For investors seeking guidance, the question should be how good were their previous predictions, but the media(neither does anyone else) does not provide a review of prior predictions. When one does have a record to review, it can be seen that no one ever has predicted market prices with any level of precision. The ‘hype’ to stimulate viewership and thus advertising revenue is everyday fare. The phrase, “If it bleeds, it leads!” is the mantra of the press. 

The media produces a story just to move on to the next story of the moment. Understanding markets and making predictions is far more complex than many perceive. Precise predictions which many investors demand and in turn are demanded by the media are truly without much value if one steps back far enough and takes into consideration enough market history to compare literally thousands of prior predictions with outcomes. The best we can do is to identify those periods when market psychology differs markedly from economic and individual corporate financials and invest as best we can to take advantage of future changes in market psychology as the economic/financial facts are eventually revealed in news headlines. This is an investment process in which we recognize that economics/financials develop first and only later become recognized by markets as having the potential for shifting prices. Once this recognition occurs, we have price shifts which occur after the fact. Market prices are connected to underlying returns by market psychology, not by mathematical models. There is tremendous imprecision in this translation. Two illustrations help to explain how markets operate and why they seem so confusing.

How Financials Translate to Market Prices illustrates the pathways of various investor styles of thinking that we speak of today. The Investing Market Personality Spectrum illustrates the fact that every investor is unique but generally falls along a spectrum spanning Momentum Investors at one end and Value Investors at the other. Not only does market psychology’s perception of future prices dominate everyday pricing with a complex mix of inputs, but market psychology itself also varies according to the complex nature of the investor spectrum. Investors mostly desire to focus on the simple theme precisely measured such as how many iPhones Apple can sell. From this information, investors make predictions on broad economic activity and specific market prices and in the process ignore the complexity of human activity occurring everywhere else. One would think today that the only companies which are important investment concepts are summed in the acronym F.A.N.G identifying Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG). Add two others, Apple (AAPL) and Tesla (TSLA), and one has the bulk of the media attention which has held investor attention in the current cycle. Every cycle has had a similar media and investor focus with this cycle being no different. This occurs because investors and the media find it is simpler to deal with only a few themes at a time and develop a type of myopia. Investing is far more complex with more than 6,000 public companies comprising the investor spectrum in the US markets alone. Every one of these companies offers its piece to solving the overall puzzle of understanding the investment marketplace. Markets are understandable and investible, but they are not predictable as we speak of them today. Once we know this, we come to the realization that we can generally guess the next change in market psychology and a future shift in prices to our advantage even though we cannot predict anything with precision. Developing one’s judgment regarding market expectations less mathematics and more about reading history, psychology, politics, philosophy, and a dozen seemingly unrelated subjects. These are all factors in learning how we view the world.

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Disclosure: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or ...

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