Wednesday, May 4, 2016

Which is Good - Predicting or Reacting to the Stock Markets?

Speculator gazing the stock market to predict the stock market / share market
Speculator gazing the market to predict market behaviour

Day in and day out, print and television media are agog with stock market forecasts and stock predictions by  so called experts, raising the important question, "Which is Good - Predicting or Reacting to the Stock Markets?"

Speculative Stock Market Predictions


The speculator and day trader constantly attempts to predict the market.  He attempts to make a judgement whether the market is likely to go up or down based on various inputs, like behaviour of other markets that had closed overnight after his own market closed, whether the market that opened before his own market is up or down, data about unemployment, GDP growth, so on and so forth. Based on his assessment of the available information he places his bets.  

He buys shares with an intention of selling them the same day at a higher price and pocket the gains. Sometimes he sells shares that he does not even own, with an intention to buy them back when the price falls, again hoping to make a gain. This is called short selling

Since these stock trading gains are insignificant after deducting brokerage, taxes, etc., brokers encourage the day traders to leverage the size of the trade by permitting placing of orders by over five to 20 times the available money (margin). This facility of placing leveraged bets is called margin trading. Margin trading enables the insignificant gains to be magnified to a reasonable size, so that the gains are meaningful.  But, this is a double edged sword.  If the bets fail, as most often they do, the losses too are magnified many times.

Television channels, including respectable ones, churn out relentless, 24 hour, debates, stock market predictions and share predictions by the so called experts, for enhancing viewership as well as filling the air time.

In short, all the so called financial market buzz is centred around day traders or speculators and focussed on trying to predict how the markets are likely to behave.

History shows that attempts at market prediction lead to ruining of health as well as financial stability of thousands of innocent speculators, who are given respectability by the brokers and media by bestowing upon them the title, 'investors'.

On the contrary Warren Buffet states categorically that he never attempts to predict markets, since markets are inherently unpredictable.  Instead, he simply reacts to market events and happenings. Meaning, if the markets fall unreasonably he will decide to make large purchases of shares of those companies which ha has already researched thoroughly. On the contrary if he finds that the markets are at unjustifiably high levels he may refrain from buying shares and instead put his money into fixed income securities like bonds.

Conclusion


History proves conclusively that stock market forecasts, stock market outlooks, stock predictions are exercises in futility. Therefore, value investors, following in the footsteps gurus like Benjamin Graham and Warren Buffett, never indulge in predicting the stock markets.  They only react to them, thus burying the debate, "Which is Good - Predicting or Reacting to the Stock Markets?"