Why can't the future of stocks be predicted

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investing1012
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Why can't the future of stocks be predicted

Post by investing1012 » Sun Sep 03, 2017 6:22 pm

Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions

avalpert
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Re: Why can't the future of stocks be predicted

Post by avalpert » Sun Sep 03, 2017 6:25 pm

Because the future isn't determined - the laws of economics aren't deterministic either.

Solo Prosperity
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Re: Why can't the future of stocks be predicted

Post by Solo Prosperity » Sun Sep 03, 2017 6:25 pm

Human involvement...

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Uncle Pennybags
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Re: Why can't the future of stocks be predicted

Post by Uncle Pennybags » Sun Sep 03, 2017 6:30 pm

investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions
Stock prices are set by what someone will pay. The law of Beanie Babies applies.
https://www.bonanza.com/listings/Rare-P ... gLIBfD_BwE
Last edited by Uncle Pennybags on Sun Sep 03, 2017 6:33 pm, edited 1 time in total.

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Re: Why can't the future of stocks be predicted

Post by aristotelian » Sun Sep 03, 2017 6:33 pm

investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions

It is not a "fact" that there are economic laws, nor that stocks follow them.

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Re: Why can't the future of stocks be predicted

Post by avalpert » Sun Sep 03, 2017 6:35 pm

Uncle Pennybags wrote:
Sun Sep 03, 2017 6:30 pm
investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions
Stock prices are set by what someone will pay. The law of Beanie Babies applies.
QuietProsperity wrote:
Sun Sep 03, 2017 6:25 pm
Human involvement...
Even if there were no humans involved and no speculation it still wouldn't be predictable because you still can't (consistently) predict whether iOS or Android will dominate the market, what impact AI will have on margins for professional services companies, when a hurricane will disrupt gas refineries and to what degree, which drugs in a Pharma's pipeline will prove effective, etc.

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Re: Why can't the future of stocks be predicted

Post by Fallible » Sun Sep 03, 2017 6:39 pm

Some reasons why from "Harvard Business Review":
The future, like any complex problem, has far too many variables to be predicted. Quantitative models, historical models, even psychic models have all been tried — and have all failed. Just imagine predicting something far simpler than the future of the stock market; say, chess. There are an overwhelming 10 to the 120th power possible moves. That’s a 1 followed by 120 zeros! As James Hogan explains it in his book Mind Matters, that sum far exceeds the number of atoms in the universe.
And more (and interesting final words):
https://hbr.org/2009/01/why-we-cant-predict-financial
Last edited by Fallible on Sun Sep 03, 2017 6:47 pm, edited 1 time in total.
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Re: Why can't the future of stocks be predicted

Post by sschullo » Sun Sep 03, 2017 6:39 pm

Just about all we know is that over time, stocks will grow. We don't know how much, how fast or slow, when a crash, correction, steady growth, or a bubble will occur. It's called uncertainty.
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Re: Why can't the future of stocks be predicted

Post by jalbert » Sun Sep 03, 2017 6:51 pm

investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions
There are laws that can predict the future of the economy?
Risk is not a guarantor of return.

investing1012
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Re: Why can't the future of stocks be predicted

Post by investing1012 » Sun Sep 03, 2017 7:46 pm

Fallible wrote:
Sun Sep 03, 2017 6:39 pm
Some reasons why from "Harvard Business Review":
The future, like any complex problem, has far too many variables to be predicted. Quantitative models, historical models, even psychic models have all been tried — and have all failed. Just imagine predicting something far simpler than the future of the stock market; say, chess. There are an overwhelming 10 to the 120th power possible moves. That’s a 1 followed by 120 zeros! As James Hogan explains it in his book Mind Matters, that sum far exceeds the number of atoms in the universe.
And more (and interesting final words):
https://hbr.org/2009/01/why-we-cant-predict-financial
I see, I think your answer makes the most sense. There are too many variables in the equation for a solution to be correctly calculated.

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Re: Why can't the future of stocks be predicted

Post by investing1012 » Sun Sep 03, 2017 7:46 pm

jalbert wrote:
Sun Sep 03, 2017 6:51 pm
investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions
There are laws that can predict the future of the economy?
Laws of supply and demand.

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Uncle Pennybags
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Re: Why can't the future of stocks be predicted

Post by Uncle Pennybags » Sun Sep 03, 2017 7:56 pm

investing1012 wrote:
Sun Sep 03, 2017 7:46 pm
Laws of supply and demand.
Price gouging laws take precedence over that law.

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Re: Why can't the future of stocks be predicted

Post by sambb » Sun Sep 03, 2017 8:00 pm

lots of things could happen
lets say there is plague or war, and the worldwide population massively declines, or cannot spend.
then, there is less demand and there could be a large effect on prices.
This is one of many things that could happen
THe japanese market is a good example - stocks can have decades long declines,

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Re: Why can't the future of stocks be predicted

Post by avalpert » Sun Sep 03, 2017 8:03 pm

investing1012 wrote:
Sun Sep 03, 2017 7:46 pm
Fallible wrote:
Sun Sep 03, 2017 6:39 pm
Some reasons why from "Harvard Business Review":
The future, like any complex problem, has far too many variables to be predicted. Quantitative models, historical models, even psychic models have all been tried — and have all failed. Just imagine predicting something far simpler than the future of the stock market; say, chess. There are an overwhelming 10 to the 120th power possible moves. That’s a 1 followed by 120 zeros! As James Hogan explains it in his book Mind Matters, that sum far exceeds the number of atoms in the universe.
And more (and interesting final words):
https://hbr.org/2009/01/why-we-cant-predict-financial
I see, I think your answer makes the most sense. There are too many variables in the equation for a solution to be correctly calculated.
It is important to recognize it isn't merely a matter of too many variables and if only we had a perfect set of knowledge of the variables today we could plug it into a supercomputer and spit out the answer - it is inherently impossible to predict

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Re: Why can't the future of stocks be predicted

Post by investing1012 » Sun Sep 03, 2017 8:04 pm

sambb wrote:
Sun Sep 03, 2017 8:00 pm
lots of things could happen
lets say there is plague or war, and the worldwide population massively declines, or cannot spend.
then, there is less demand and there could be a large effect on prices.
This is one of many things that could happen
THe japanese market is a good example - stocks can have decades long declines,
What is there to prevent the US Total stock market to follow the Japanese model and have decades long decline. That scares me.

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Re: Why can't the future of stocks be predicted

Post by PFInterest » Sun Sep 03, 2017 8:05 pm

Seriously?

investing1012
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Re: Why can't the future of stocks be predicted

Post by investing1012 » Sun Sep 03, 2017 8:07 pm

PFInterest wrote:
Sun Sep 03, 2017 8:05 pm
Seriously?
Yes, it's a real question.

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Re: Why can't the future of stocks be predicted

Post by avalpert » Sun Sep 03, 2017 8:09 pm

investing1012 wrote:
Sun Sep 03, 2017 7:46 pm
jalbert wrote:
Sun Sep 03, 2017 6:51 pm
investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions
There are laws that can predict the future of the economy?
Laws of supply and demand.
Laws of supply and demand aren't laws like the 2nd law of thermodynamics or the law of conservation mass-energy. It is a theory that is generally applicable but is based on some assumptions that don't consistently hold up in the real world (like sticky preferences).

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Re: Why can't the future of stocks be predicted

Post by livesoft » Sun Sep 03, 2017 8:14 pm

investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions
Name two leaders of nuclear countries that act rationally.
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Re: Why can't the future of stocks be predicted

Post by lack_ey » Sun Sep 03, 2017 8:39 pm

There are a lot of problems that are intractable and can't be predicted with any real certainty, even including natural phenomena like the weather a year from today, the timing of the next earthquake, and so on. Some can be done with some accuracy like the weather the next day. For human systems, there's everything from violent crime rate to productivity growth to Apple's phone market share that can be predicted to some decent degree (despite "human involvement"), to more difficult problems like the timing of the next recession.

In general you can gather data and build a predictive model that can give you some rough idea—be it qualitative or quantitative or some kind of combination of methods and sources of information—in cases where all the relevant information can't be known, or the relationships are too difficult to determine or unknown. In others such as determining the timing of the next solar eclipse, the factors are more or less deterministic and observed, and as such the answer can be analytically derived. So in the very least you can have a sense of the trend, what the mean might be, and the range of where things might go.

One of the reasons stock returns can't be predicted very well is that the future of stocks can be predicted to a certain extent, and that is one of the key components of stock pricing. The predictions go into the price, which makes the forward return more random, removing the biases and future predictability that would otherwise be present. That's the exact behavior you should expect from stocks most of the time because they are well traded, heavily watched, and competitively traded by competing profit seekers that are probably more informed than you are.

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Re: Why can't the future of stocks be predicted

Post by bottlecap » Sun Sep 03, 2017 8:48 pm

Because there are many unknowns. Economics can't solve for unknowns.

The biggest unknown is people. If one could consistently predetermine the wants of the individual, no companies would fail for lack of demand.

But even if you knew what people would want in 6 months or a year, you have to successfully figure out how to procure the materials and put it together for them. And thousands of others are trying to do it better than you. As an investor, how do I know that you will rise to the top?

This doesn't even account for other uncontrollable unknowns like, weather, disasters, war, technological advances, etc... Those can throw a wrench in your plans.

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Re: Why can't the future of stocks be predicted

Post by Blueskies123 » Sun Sep 03, 2017 9:02 pm

investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions

They can and are predicted, just not accurately.

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Re: Why can't the future of stocks be predicted

Post by KyleAAA » Sun Sep 03, 2017 9:03 pm

Because nobody knows the future. If you knew he future, you could easily predict stock prices. OP's question reduces to, simply, "why can't the future be predicted?" I suppose that's more a question for a physics or philosophy forum.

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Re: Why can't the future of stocks be predicted

Post by lws6772 » Sun Sep 03, 2017 9:12 pm

Too many variables and it would also cause the thread to be locked.

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Re: Why can't the future of stocks be predicted

Post by badbreath » Sun Sep 03, 2017 9:21 pm

historically it has gone up so maybe up. But it could go sideways line Japan or it could go down like 30s or 08,09. that's my prediction
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Re: Why can't the future of stocks be predicted

Post by arcticpineapplecorp. » Sun Sep 03, 2017 9:33 pm

investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions
Well, your entire premise rests on the assumption that people engage in rational actions. Clearly this is not true. Even if we stick to just economic decisions (and leave all other decisions behind), can you name one or more Homo Economicus? That term means the human who makes perfectly rational economic decisions at all times. Never gonna happen. You've seen those "Should I buy a $5000 watch?" posts on bogleheads, right?

Perhaps you should familiarize yourself with the works of Daniel Kahneman and Amos Tversky, Dan Ariely, Sunstein and Thaler and other behavioral economists. They show that humans are "predictably irrational" (that's the title of a book by Dan Ariely).

https://www.google.com/search?q=predict ... 8&oe=utf-8
https://www.google.com/search?q=tversky ... 8&oe=utf-8
https://www.google.com/search?q=daniel+ ... 8&oe=utf-8

Michael Lewis' new book "The Undoing Project" was a good read about the friendship and collaboration of Kahneman and Tversky that lead to the creation of the field of behavioral economics. Daniel Kahneman has a popular book called "Thinking fast and slow". Haven't read it, but it's on my list and comes highly recommended.

Thaler and Sunstein wrote a book called "Nudge" that showed that people often just choose whatever default option is provided. As an example, if you have a 401K plan with the default option of non-participate (i.e., you need to take action to participate) there's a higher percentage of people who don't participate in their 401k. Merely changing the default option to "opt-in" increases the participation rate (because people just stick with that option. They won't take action to not participate if they're automatically enrolled). Not very rational at all. It's called human nature.

But I do think the better reason why stock prices can't be predicted is as others have said there are too many variables and anything can change in an instant. All it takes is some bad news (recall, lysteria outbreak, etc.) to change the future profitability of a company. These things can come out of nowhere and change everyone's expectations.
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Re: Why can't the future of stocks be predicted

Post by student » Sun Sep 03, 2017 9:34 pm

I think the point is not whether the future of stocks can be predicted, it is whether anybody is able to do so now. I certainly do not believe fund managers can do it. If someone can, he/she won't be telling.

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Re: Why can't the future of stocks be predicted

Post by Dottie57 » Sun Sep 03, 2017 9:36 pm

investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions

I consider economcs to be part psychology. Fear, greed combine with a bit of rationality to give unpredictable results.

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Re: Why can't the future of stocks be predicted

Post by oldcomputerguy » Sun Sep 03, 2017 9:37 pm

investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions
Because Hari Seldon hasn't yet invented psychohistory.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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Re: Why can't the future of stocks be predicted

Post by Uncle Pennybags » Sun Sep 03, 2017 9:42 pm

Black Swans.

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Re: Why can't the future of stocks be predicted

Post by pkcrafter » Sun Sep 03, 2017 9:50 pm

All these great and rational reasons, and yet investors still try to predict the future. :confused

When it comes to rational behavior, investors are often off the rails.


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Re: Why can't the future of stocks be predicted

Post by TD2626 » Sun Sep 03, 2017 10:25 pm

To statistics people: the future can be predicted, but it has a high standard deviation and a positive excess kurtosis. (Thus, the predictions aren't very reliable).

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Re: Why can't the future of stocks be predicted

Post by TD2626 » Sun Sep 03, 2017 10:36 pm

investing1012 wrote:
Sun Sep 03, 2017 8:04 pm
sambb wrote:
Sun Sep 03, 2017 8:00 pm
lots of things could happen
lets say there is plague or war, and the worldwide population massively declines, or cannot spend.
then, there is less demand and there could be a large effect on prices.
This is one of many things that could happen
THe japanese market is a good example - stocks can have decades long declines,
What is there to prevent the US Total stock market to follow the Japanese model and have decades long decline. That scares me.
Nothing. That's one reason why the Boglehead the three fund portfolio has an allocation to international stocks (and to bonds).

This study may be relevant and interesting:
https://finpage.blog/2017/02/06/a-short ... se-crisis/

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Re: Why can't the future of stocks be predicted

Post by avalpert » Sun Sep 03, 2017 10:49 pm

livesoft wrote:
Sun Sep 03, 2017 8:14 pm
investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions
Name two leaders of nuclear countries that act rationally.
Emmanuel Macron and Benjamin Netanyahu - may disagree with their politics but they both seem to act very rationally

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Re: Why can't the future of stocks be predicted

Post by Pajamas » Sun Sep 03, 2017 10:58 pm

I predict that this thread will be locked and that it will have no effect on the future of stocks. :oops:

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Re: Why can't the future of stocks be predicted

Post by Valuethinker » Mon Sep 04, 2017 3:37 am

investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions
"The Economy" is a human construct.

Inflation, GDP, unemployment stats. These are all created by human beings. There is not even total agreement about how to calculate them. Money Supply is an example where there is no one number, and the numbers that are created are not reliable.

Humans are not rational. Anything but.

You might start with "The Undoing Project" by Michael Lewis. All of his books about finance (starting with Liar's Poker, which is indispensable) are worth a read. But TUP is specifically about human irrationality and economics.

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Re: Why can't the future of stocks be predicted

Post by Valuethinker » Mon Sep 04, 2017 3:40 am

avalpert wrote:
Sun Sep 03, 2017 10:49 pm
livesoft wrote:
Sun Sep 03, 2017 8:14 pm
investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions
Name two leaders of nuclear countries that act rationally.
Emmanuel Macron and Benjamin Netanyahu - may disagree with their politics but they both seem to act very rationally
Israel has never officially admitted (neither has the US said officially, AFAIK) that it has nuclear weapons ;-). They've never tested one ;-).

Theresa May, Vladimir Putin, Donald Trump, Chairman Xi, Mr Modi, his Pakistani equivalent -- all of the nuclear club behave quite rationally.

So far the North Korean leader has behaved quite rationally (albeit recklessly). There is a logic to what he is doing-- even paranoids have real enemies.

Whether this continues is a moot point. But, for the moment, all the nuclear armed states (plus Israel ;-)) behave quite cautiously and rationally with regard to nuclear weapons.

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Re: Why can't the future of stocks be predicted

Post by SGM » Mon Sep 04, 2017 4:19 am

Is this a Far Side cartoon?

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Re: Why can't the future of stocks be predicted

Post by GoldenFinch » Mon Sep 04, 2017 4:41 am

SGM wrote:
Mon Sep 04, 2017 4:19 am
Is this a Far Side cartoon?
Yes. In the comic the Wicked Witch of the West was just melted (as you remember, it was very dramatic) but what was never explained was what happened to her crystal ball.

(Wait a minute, if her crystal ball worked so well why didn't she avoid getting melted in the first place?)

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Re: Why can't the future of stocks be predicted

Post by tadamsmar » Mon Sep 04, 2017 7:36 am

investing1012 wrote:
Sun Sep 03, 2017 6:22 pm
Why can't the future of stocks be predicted, considering the fact that stocks should follow the laws of economy which you would think are based on rational actions
They can be predicted to some extent. We invest in stocks because we give credence to the prediction that stocks are more likely to increase in value than not over a long period.

But it's hard to predict better than the next guy and beat the market. As a matter of fact, claims that the market can be beat are typically based on laws (if that is the right word) of behavioral finance that are based on irrational actions.

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Re: Why can't the future of stocks be predicted

Post by spectec » Mon Sep 04, 2017 8:41 am

GoldenFinch wrote:
Mon Sep 04, 2017 4:41 am
SGM wrote:
Mon Sep 04, 2017 4:19 am
Is this a Far Side cartoon?
Yes. In the comic the Wicked Witch of the West was just melted (as you remember, it was very dramatic) but what was never explained was what happened to her crystal ball.

(Wait a minute, if her crystal ball worked so well why didn't she avoid getting melted in the first place?)
Black swan event?
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Re: Why can't the future of stocks be predicted

Post by Uncle Pennybags » Mon Sep 04, 2017 9:52 am

tadamsmar wrote:
Mon Sep 04, 2017 7:36 am
But it's hard to predict better than the next guy and beat the market.
Insider trading and high speed direct connections to the markets that skim money from "retail" day traders are a sure way to beat the market. IMHO retail trading is like betting against the house, a suckers game. Boglehead investing is betting with the house minus a small vig.

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Re: Why can't the future of stocks be predicted

Post by Top99% » Mon Sep 04, 2017 10:33 am

I guess it depends on how you define "predict" but I am banking about 35% of my future on predicting that over the next 40 years stocks will produce positive returns relative to inflation. So I can make a prediction and hopefully it will be correct.
Adapt or perish

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Re: Why can't the future of stocks be predicted

Post by soupcxan » Mon Sep 04, 2017 10:46 am

[deleted]
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Re: Why can't the future of stocks be predicted

Post by Valuethinker » Mon Sep 04, 2017 10:50 am

SGM wrote:
Mon Sep 04, 2017 4:19 am
Is this a Far Side cartoon?
Actually it's a typical entrance exam question for Oxford or Cambridge Universities.

We may be providing free consulting here, ladies & gents.

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Re: Why can't the future of stocks be predicted

Post by arcticpineapplecorp. » Mon Sep 04, 2017 11:01 am

GoldenFinch wrote:
Mon Sep 04, 2017 4:41 am
SGM wrote:
Mon Sep 04, 2017 4:19 am
Is this a Far Side cartoon?
Yes. In the comic the Wicked Witch of the West was just melted (as you remember, it was very dramatic) but what was never explained was what happened to her crystal ball.

(Wait a minute, if her crystal ball worked so well why didn't she avoid getting melted in the first place?)
Because her crystal ball didn't predict the future. The witch's crystal ball if you remember (from the movie anyway) only showed her what was happening in the present (at other places--poppyfield, etc). It had no predictive power, which is why she said at the end of the movie, "What a world! Who would have thought a good little girl like you could destroy my beautiful wickedness?"

She never saw it coming, because her crystal ball didn't show her the future. It only showed her what was happening (presently) somewhere else, not what would happen in the future. In short, she had the wrong crystal ball.

And therein lies the answer to this marvelous conundrum. Why can't the future of stocks be predicted? Because no one has the RIGHT crystal ball.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Why can't the future of stocks be predicted

Post by Fallible » Mon Sep 04, 2017 11:20 am

In his classic book, Winning the Loser's Game (7th ed.), Charles Ellis pretty much sums up stock market predictions in a chapter, "Predicting the Market - Roughly."

"Predicting the stock market roughly is not hard, but predicting it accurately is truly impossible. Equally, predicting approximately where the stock market will normally be in the long run is not hard, but even estimating how it will move over the next few months is nearly impossible - and pointless."

I like the "pointless" reference.
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tibbitts
Posts: 8003
Joined: Tue Feb 27, 2007 6:50 pm

Re: Why can't the future of stocks be predicted

Post by tibbitts » Mon Sep 04, 2017 11:26 am

If the future of stocks couldn't be predicted and everyone agreed on that, probably all investment markets would immediately tank due to all the people involved in the business of doing so suddenly being out of work. So of course the future of stocks can be predicted and is all the time, but being predicted accurately is another story.

chevca
Posts: 1906
Joined: Wed Jul 26, 2017 11:22 am

Re: Why can't the future of stocks be predicted

Post by chevca » Mon Sep 04, 2017 11:38 am

soupcxan wrote:
Mon Sep 04, 2017 10:46 am
Why can't the future of weather be predicted more than a couple days out, considering the fact that weather should follow the laws of physics?
Farmers' Almanac. :happy

chevca
Posts: 1906
Joined: Wed Jul 26, 2017 11:22 am

Re: Why can't the future of stocks be predicted

Post by chevca » Mon Sep 04, 2017 11:43 am

And, what is this thread about anyway? Future stock market predictions are made all the time. Just watch any finance noise channel. There are even more reputable folks that make future market predictions. They are all just that though... predictions.

Did the OP mean why can't the future of stocks be known? Well, that has been explained nicely in this one. Bascially, because.... humans. :happy

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