Forecasting the Stock Market

 

Every day I see in the financialsection of newspapers how to forecast what themarket will do in 6 months, 12 months, severalyears. "Ten stocks that will double in the next 6months." Right! I have trouble trying to forecastwhat it will do tomorrow. Do not trust any whoclaims he knows what the future will be for themarket.

Of course, your broker will send yougobs of slick material about various companiesthat predict they will double or triple in thenext 12 months. On the New York Stock Exchangethere 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'mnot and I am considered a professional trader. AndI am sure your broker isn't either. He just wantsto make a commission and is probably promoting astock his brokerage company wants to push.

Every investor wants to know thefuture and will send money to some "expert" whowill send him news about a company that only (?)he knows. And pigs can fly. One thing about themarket. It is almost impossible to keep a secretand everyone knows everything about othercompanies. As soon as some "analyst" finds acogent fact that can influence a stock price hewill share that "secret" with a few close friends. Within minutes the "secret" is known by hundredsof thousands and is immediately reflected in theprice of the stock.

If you do get sucked into one of thesemoney traps by some smooth-talking salesman ornewspaper verbiage I strongly suggest youimmediately plan your exit strategy. Without anexit plan you can easily lose a large amount ofyour "investment". This is not an investment; itis a gamble and should be treated as such. Thefirst thought of any professional trader is 'if Iam wrong how much am I willing to lose'? Maybe 2%,5%, certainly no more than 10%. Pros understandthat small losses are OK, but never take a bigloss.

From 1982 to 2000 it seemed everyonewas a financial genius. How many of those folkskept 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 ModernPortfolio Theory is based on a 40 year time line.

Yes, but understand you don't need topredict anything. Don't forecast. What you caneasily learn is follow the major trend. You boughtin 1982 and you sold out in 2000. The trend can befound in many ways with the simplest being postedevery day in Investors Business Daily newspaperunder the IBD Mutual Fund Index. When the Indexprice is above the 200-day moving average you ownequities and when it is below you are in cash orbonds. Nothing complicated,

Don't try to forecast the market. Let the markettrend tell you.

 



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