Comments on: Can the Stock Market Predict the Future?

By: Emily

Emily — Wed, 11 Feb 2009 06:49:24 +0000

Totally agree with Patrick on the whole “odd beast” take. Whats always concerned me is the part of volatility that hinges solely on the insanely influential opinions the “market movers” have… like Meredith Whitney who can raise a pinky and there goes the stampede. Not like market movers haven’t EARNED themselves the title, as they likely have made correct assumptions for long enough to gain this kind of attention/respect, but eventually like all humans one day they are going to have to be wrong, and it could very well be that their “oops” ruined your life in one fell swoop. Of course we are all hypocrites in our own right; and if I was given the choice of Warren Buffet or Britney Spears to pick me out a handful of sweet stocks I’d have to pick the first, but at least we all know in the back of our heads that crazy Britney has just as good of that random chance as Warren in scoring us a hit. and that is scary.

By: Todd

Todd — Tue, 10 Feb 2009 20:37:51 +0000

I agree that the market is self-fulfilling. When the analyst start reporting that things are going down in a bad way, institutions start unloading shares. Investors see the market tanking and hear about it from their advisors, so they start selling their shares. The market goes down as money is being pulled out without new money to replace those positions. A reversal of fortune takes time because the big institutional investors need money to buy even the most obviously mispriced securities. They don’t get that money flowing back in until investor confidence is restored. Hopefully that happens asap – who knows?

I’m actually pretty numb to market moves. I’ve been investing long enough not to panic sell. That hasn’t saved me from taking a couple of bad losses in this market (see – Bank of America). Good post.

By: Mike

Mike — Tue, 10 Feb 2009 18:33:51 +0000

I think there’s generally one exception, which is insider trading. There’s asymmetric information here. It’s practically guaranteed that Joe Schmos like you and me know less about these stocks than better placed people who may be trading both illegally and legally. It’s like that terrorist futures market that the DoD tried to set up. Markets can be an accurate predictor. Perhaps not the overall market, but there are definitely insiders making trades who can point out likely outcomes.

By: Patrick is Very Evolved

Patrick is Very Evolved — Tue, 10 Feb 2009 17:07:23 +0000

The market is an odd beast. In some ways it is analogous to Heisenberg’s uncertainty principle – interacting with the market by getting scared or confident can change it’s behavior.

But if we try to conduct a retrospective scientific experiment on past data (which is fixed and can’t be influenced) we can test the question in your title. The question we need to ask of the data is this: How many “downward ticks” have we seen over the last 50 years equal in speed to those in 2001 and 2008 that DIDN’T lead to recession.

My guess would be that there have been lots and lots more 4-6 month declines equal in magnitude that didn’t result in a domino collapse.

But i specifically say 4-6 months here because what you say is spot on Phil – it’s self fulfilling, so the longer it goes on the more likely people are to believe it.

And now were out of the realm of maths and physics and into the messy world of the human brain and behavior.

Cheers
Patrick