Forecasting the Stock Market

Every day I see in the financial
section of newspapers how to forecast what the
market will do in 6 months, 12 months, several
years. “Ten stocks that will double in the next 6
months.” Right! I have trouble trying to forecast
what it will do tomorrow. Do not trust any who
claims he knows what the future will be for the
market.

Of course, your broker will send you
gobs of slick material about various companies
that predict they will double or triple in the
next 12 months. On the New York Stock Exchange
there will be about one half of one per cent
(0.5%) of companies that will double this year.
Are you smart enough to pick those winners? I’m
not and I am considered a professional trader. And
I am sure your broker isn’t either. He just wants
to make a commission and is probably promoting a
stock his brokerage company wants to push.

Every investor wants to know the
future and will send money to some “expert” who
will send him news about a company that only (?)
he knows. And pigs can fly. One thing about the
market. It is almost impossible to keep a secret
and everyone knows everything about other
companies. As soon as some “analyst” finds a
cogent fact that can influence a stock price he
will share that “secret” with a few close friends.
Within minutes the “secret” is known by hundreds
of thousands and is immediately reflected in the
price of the stock.

If you do get sucked into one of these
money traps by some smooth-talking salesman or
newspaper verbiage I strongly suggest you
immediately plan your exit strategy. Without an
exit plan you can easily lose a large amount of
your “investment”. This is not an investment; it
is a gamble and should be treated as such. The
first thought of any professional trader is ‘if I
am wrong how much am I willing to lose’? Maybe 2%,
5%, certainly no more than 10%. Pros understand
that small losses are OK, but never take a big
loss.

From 1982 to 2000 it seemed everyone
was a financial genius. How many of those folks
kept those big winnings from 2000? Almost none.
Most lost 40% to 60% of their money. Brokers said,
“Hang in there. You are in for the long haul”.
Unfortunately he did not tell you that Modern
Portfolio Theory is based on a 40 year time line.

Yes, but understand you don’t need to
predict anything. Don’t forecast. What you can
easily learn is follow the major trend. You bought
in 1982 and you sold out in 2000. The trend can be
found in many ways with the simplest being posted
every day in Investors Business Daily newspaper
under the IBD Mutual Fund Index. When the Index
price is above the 200-day moving average you own
equities and when it is below you are in cash or
bonds. Nothing complicated,

Don’t try to forecast the market. Let the market
trend tell you.