Why Stock Market Prediction is Useless

Dec 9th, 2010No Comments

Do not even try your hand at stock market prediction. Try and fail and someone is sure to shrug and say simply: “That is just how the stock market works! Better luck next time!”

When predicting the future, you may be lucky sometimes but ultimately you will lose. If most people could reliably predict which way the market would turn next there would be no market; everyone would want to buy at the same time or sell at the same time. The market always represents opposing views.

Obviously it would be more profitable if we could buy low and sell high before the next bear market. Don’t assume logic and stock markets speak the same language. A large number of people have used logic to lose fortunes.

People’s reasons for taking a specific action are different one from another. For some, investing in shares is a psychological game the object of which is to win a test of wills. As a broker I had the daily opportunity to watch two gladiators, invisible to each other, each unwilling to budge a single penny on a high-priced stock to complete a trade. That’s one dollar on 100 shares. The only sense it made was that one would gain ego satisfaction.

Higher cost is often the price

More often than not, the price ran away from the buyer and he ended up paying more than he needed to do. If you’re going to buy, just do so; don’t play games.

One of the solid advantages of the Wealthy Investor system is that it sets a target to buy or to sell one week ahead. There’s no umming and ahhing. The decision is made, you contact your discount broker, enter the order and if the price is reached you buy or sell without the typical second-guessing. This is a businesslike approach to dealing in stocks without stock market prediction.

Making money from underlying companies should be the only reason for investing in stocks. The market is no place for a test of manhood or for trying to guess stock market trends. Investing needs to be treated as a business. It needs to be carried out in a methodical, businesslike manner. The root word of methodical is method.

Impossible to time markets? Poppycock!

Those who don’t know how to do so with any success say stock market timing is impossible. Poppycock! Just look at our test results, achieved by a dumb old box of wires and chips without human intervention.

Early in this business I was told all you had to do to make money with stocks was to buy low and sell high. Then the broker walked away laughing, clearly not knowing how to put that sage information to use. But it’s obvious, isn’t it? If you can buy at low prices and sell at higher prices you cannot fail to make money.

It’s not quite as easy as it sounds. Buying at the absolute bottom and selling at the absolute top happens rarely. Luck can certainly be helpful but you don’t want to risk your retirement money on Lady Luck’s throw of the dice.

The Wealthy Investor program starts from the logic that stocks rise and fall. You don’t need me to tell you that. The strategy started in the mid-1980s with my then Canadian national best selling book, long out of print, Take the Guessing out of Investing. That a technical analysis book could fly so quickly off the shelves was astounding to me. Clients average just over 22% annual returns in real life.

A 25-Year Journey

These were the days when computers were clunky things that could do only a fraction of what today’s computers can do and programmers then did not have all the tools and languages available to them today. The Internet was in its infancy so delivery of a weekly newsletter was by expensive special delivery mail. That newsletter cost $108 a month and I literally had to turn millionaire investors away about twice a week. I was afraid the size of their collective investments would destabilize the market.

For years I have been certain I could improve those results. In March, 2009, I took a fresh look at that old book. In less than 30 minutes I drew the outline for the new program. I still have that scrap of paper.

But you know how it is: you get an idea, know it will work, but if you just add a tweak of this and a pinch of that it will work better. Well it did not! In my eyes it was awful, with average returns in the 11% and 12% range. In frustration during one of the many days of computerized testing, I threw out rules that the industry believes to be commonsense. And the returns came back as 55.49% for the 30 stocks in the Dow Jones Industrial Average, not for penny start-ups that can have fantastic returns if you’re lucky and brave enough.

An obvious marketing challenge

At that point, I knew we had a marketing problem. Can you imagine something so good you are afraid people will not believe you? It’s like trying to sell genuine $1,000 bills on a street corner for $20. There are so may scams and empty promises on the Internet. I knew we could not market this program without absolute transparency even to the point that people will not need us once they understand the system. And I knew we needed professional help.

Amazingly, what was designed later differed by only the length of one small parameter from what is written on that scrap of paper. Originally, it came in at close to a 30% rate of return over some 40 years of testing the current 30 stocks that make up the Dow Jones Industrial Average. That was what I had expected for some years could be achieved.

Today’s results after a great deal of testing and programming are vastly different; all the data is published weekly on a separate secure website available free for now. Should you blindly believe the staggering numbers? No, we don’t want you to do that. We want you to examine the rules and then the charts we provide to make sure that every single rule had been followed precisely. Only then will you begin to understand what you now have in your hands. It can change your life.

Very different program working with reality

The program does not go in for the usual type of stock market prediction or speculation. It works with reality. It follows an existing trend when there is one and forecasts what would have to happen in the next week to indicate a change in that trend. If the target is met, the computer calls for either buying or selling the stock. Market timing in a box…that works!

Trends are not straight lines; that would be too easy. The system allows for extreme choppiness at market bottoms when investors are uncertain whether the plunge is over. Typically, they wait for lower prices only to find the stock running away from them. So much for stock market prediction!

Some investors apply stop loss orders the moment they buy a stock and wonder why they are out with a loss soon after. Expect choppiness at market bottoms (it happens at tops, too) and make allowances for that. That’s just how the stock market works to reflect investor nerves.

Our stop loss rules are unlike anything you will find elsewhere. So is the program we use for measuring trends and for avoiding the damage of short-term corrections. In fact, there are at least seven rules you will find nowhere else. We will discuss all of them in other articles. There’s no stock market prediction, simply measurement of what the market tells us.