Any time there are big market moves in the stock market, the talking heads come out and always confidently proclaim things as if they have a crystal ball. The recent stock market dip that happened on December 24th, 2018 brought them out as usual. “This isn’t the bottom. There’s another 10 to 15 percent left to fall.”
Exactly, what the hell is this special knowledge predicated on? Exactly how precisely, are you claiming to know the bottom of a recent down market within 5%. I’ve been investing for 23 years and I can confidently say a few things about the market and investing.
- There are many, many variables that go into the valuation of any particular companies stock at any one moment in time. Let’s take a look at just a few. The company has recent earnings, as well as expected earnings. There may be rumors that a vice president has failing health. (That VP may or may not have health issues. Or maybe he overcomes them) A competing company might have made some advances
on a bettertechnology. Or the competing company might make missteps. An individual companies stock is always competing with other investments in themarket. Are treasury rates attractive? A particular stock can also often goes with “the flow” of the market. When the market is crashing, there’s downwordpressure on this particular company regardless of if things are going well. Did we mention that one factor affecting price is the price of the stock relative to the expected future earnings of the company ie P/E ratio? It’s impossible to properly calculate with accuracy how these thousands of variables (many variables are info that is unavailable to you) are going to affect the dynamic valuation of a company.
- All these variables go into the valuation. But the most difficult are the things that happen in the future. You have no way of knowing the outcome of trade wars. You have no way of knowing what the president is going to tweet tomorrow that might tank markets or cause a rebound.
These market gurus usually phrase things in a way that leaves wiggle room for their prediction to be entirely wrong but for them to not sound like idiots.
On December 27th, the stock market rebounded with considerable gains. The S&P 500 climbed nearly 5% in one day. Great. But what will happen tomorrow? The only honest answer is I don’t know. People that have been nervous about big losses may sell in droves since the market went up a bit and perhaps the learned that they don’t have the stomach for a volatile market. Or the recent rebound could inspire confidence and people will buy in droves. Anything can happen and we don’t have a crystal ball so honestly it’s anyone’s best guess. If anyone can prove me wrong, I welcome them to give it a shot and just predict what the market will do for just three days in a row.
All you need to know is that when you buy stocks, you’re buying ownership of the rights of companies that are generally doing all they can to make money every day. Owning these companies is a good thing. It’s not easy to consistency pick a winner, but the wisdom of owning a lot of these companies through an index fund gives you the best shot at success through diversification.
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