This question always amuses me, since the seeker thinks that the so-called ‘expert’ would give him a profound advice on not only the direction of the market, but also be able to accurately forecast what would be the market’s closing price tomorrow, day after, a year or 5 years (time-duration is not a constraint, after all).
A forecaster who can predict both the direction and the market’s closing price consistently over a period does not exist. Consistency is the key word here.
This brings us to a very fundamental question “Who is market?”. While, market is nothing but a collection of people – buyers and sellers who act together to set a market price in order to trade.
Hence, market price gets determined by the number of market participants, volume of the asset they want to transact, each of them having a personal insight or perception of the asset’s intrinsic value at which they would either buy or sell.
Market price merely, therefore, reflects the average insight of the participants. While calculating weighted average is easy, however, its extremely difficult to understand the nature of the participants or the crowd, since they are affected by:
- Emotion: This is one of the investor’s greatest enemies. Becoming envious when others are getting richer in the market is natural; so is becoming fearful, when your stock prices start plummeting. Maintaining emotional maturity when your stock is falling, or rising is not easy.
- Confidence: Confidence in one’s abilities, about stock-selection, and allocation swings wildly as the markets become volatile. From being over-confident about a stock/industry/economy, one can become extremely bearish due to a minor event(s).
- Inter-connectedness: Inability to understand inter-connectedness about events results in prices to fluctuate and reach extreme levels. 9/11 Terrorist attacks resulted in decline in air-travel, slump in airplane orders, creation of terrorism as a class of risk which perhaps never existed before in the insurance world, thereby resulting in enhanced insurance business subsequently. Magnitude and direction of such inter-connectedness of events is not easy to decipher by the market participants.
An expert should be able to calculate emotions of market participants, their confidence and the fact that they have been correctly been able to understand the inter-connectedness of the events. Do you really think so?
So, next time you ask this question and an ‘expert’ starts to rattle a long-drawn gibberish about market moving down or up, yesterday or in future due to political uncertainty, oil, interest rates, terrorism, sanctions, etc, tune off the noise as soon as possible.
Disclaimer: Please note that these are my personal views. While, I am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.