What Makes The Stock Market Hard To Predict?

Our inability to predict the stock market is a known fact; if we could predict the future we would all be gods and if we could predict the outcome of our investments, we probably wouldn’t gain as much from it

A popular quote by Warren Buffet is “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” Our inability to predict the stock market is a known fact; if we could predict the future we would all be gods and if we could predict the outcome of our investments, we probably wouldn’t gain as much from it. (Remember, little risk and little return?)

Investing in the stock market is no game of chance, but it is also not one with predetermined outcomes. Needless to say, the world probably wouldn’t be as fun if we knew every single thing that would happen to us before it did.

In the stock market, there are a myriad of decisions we are required to make every now and then. Which stocks to invest in? What the makeup of our portfolio should be? How much we should invest? How long to wait before pulling out our investment?

While we can all agree that the stock market is a giant unpredictable platform, not many of us probably understand why it is so. Why do predictive models at best give us an opportunity to make educated guesses alone? Why isn’t it possible to analytically reach a set outcome? Here are some of the key reasons why:

The future is generally hard to predict

The only thing constant in life is change and this change does not alter the past. The stock market is a place where current events have their implications set in the future and since it is hard to predict the future, not unless you’re a fortuneteller, it is also hard to predict the future in the grand scheme of things.

The changing value of stocks

The basic idea for investing is to buy at a low price and sell at a high one. As such, if we could predict for a fact that the share price of a stock would rise, we would rush to buy the shares so we can sell at a high price.

On the flip side, if we could tell for a fact that the share price of a stock would fall, then we would avoid the stock like a plague and possibly dispose it immediately. However, the basic elements of this lies in determining the true or actual value of a stock.

For example, if the real value of a stock per share is N100 and it is being sold at N60, we immediately see that the actual value is much higher and want to have the stock. If the figures are switched, we would then avoid the stock because we would realize that it is overvalued.

Determining the true price of a stock is the hard part. However, because there are a number of formula to determine the fair value of a company, all of which potentially yield different results, we just cannot tell what will happen with the share price.

Unpredictable events

The stock market can be affected by random events and this is because where something happens to a company out of the blues, its shares can either rise, take a plunge, or not move at all.

The utter unpredictability of not just whether events would happen or not, but also whether the value of a stock would move in a direct correlation with the change, makes it hard to keep tabs on possible happenings of the market.

The Understanding that we control the market

What happens when a set of people who are inherently irrational by virtue of the DNA, are given the power to control the happenings of the stock market? Anything. The actions of the market controls the volatility in the value of stocks and it is why many times, strategies can be counterproductive especially when everybody is thinking the same way.

Using a very theoretical example, if the price of stocks seem to be falling, the natural reaction is that people buy more of it. However, it is that very demand for it that makes the price rise all over again. What is even worse is that it is possible that the price would fall and people would still not be interested in purchasing the shares.

The unpredictability of human nature is, as such, also a key reason why we can’t predict the market.

For these reasons, strategies that revolve around predictions such as timing the market, should be used solely for the purpose of increasing knowledge. Never for making relevant decisions.

Written by Lawretta Egba.