Marc Cuniberti During times of market duress, investors sometimes say they get “gut feelings” about where the market is headed. Less likely to occur during up markets, somehow the brain develops some storyline during market corrections that it’s only going to get worse and that their guardian angel (or whatever they call it) is telling them to sell their stocks and get out.
Since many mom and pop investors are not schooled in how markets operate, their gut feelings are just that, feelings based on nothing concrete. It is more likely their gut is reacting to what already is transpiring in the markets instead of some divine intervention.
Usually late to the party, mom and pop investors do not realize that the markets may be reacting to the Random Walk theory. The theory states that stocks do not follow any predictable pattern but instead take a random and unpredictable “walk” as to their prices and therefore forecasting where prices will go is impossible.
Also for consideration is the Consistent Market theory. This theory assumes all information about companies and their stock is known and therefore already priced into the market. Unless it is insider information, which is illegal to trade on, the price of a stock is where it should be at any given time. This means thinking a stock is cheap or expensive and should move up or down accordingly sometime in the future is nonsense.
Gut feelings in my experience are also nonsense. Although some gut feelings may prove out to be correct in accordance with what happens next in the markets, gut feelings can just as easily be wrong.
Forecasting markets is impossible with a 100% degree of certainty and although there are advisors, analysts, and investors that seem to be right more often than wrong, to know what will happen in the markets is the unattainable holy grail of investing.
When a mom-and-pop investor claims to have a gut feeling as to where the markets will go, in my experience, they are usually wrong. The reason is that markets are only the sum of all the decisions of all the investors in it at any one time. So if the markets are falling and you get a gut feeling to get out, there may be just as many traders thinking falling markets yield excellent buying opportunities.
More often than not, when mom-and-pop decide to sell, it may actually be time to start buying.
The reason trading on gut feelings could be hazardous to your portfolio is because these feelings are reactionary and are responding to what has already occurred.
It means if someone comes to me and tells me they have a gut feeling the markets will sell-off, it usually happens when the markets have already done so.
Hence the old adage: “the markets climb a wall of worry”.
If an investor desires to improve their ability to strive toward better markets forecasting, they can start by educating themselves on the markets in general.
I have always said education is the cornerstone of progress, and this holds true for those desiring to be more knowledgeable and capable investors.
Although no one can forecast where markets will go with 100% certainty, some people are better than others.
Those that are consistently on the right side of things do not achieve their success by listening to their gut feelings. Instead, the ones I know that are better market prognosticators are highly educated in everything that has to do with the markets and our economy.
Past performance does not guarantee future results. Contains the opinions of Marc Cuniberti only and should not be construed as investment advice or a solicitation to buy or sell any securities, nor represents the opinion of any bank, investment or advisory firm. Neither Money Management Radio (“Money Matters”) nor Bay Area Process receive, control, access or monitor client funds, accounts, or portfolios. California Insurance License #0L34249. Insurance services offered independently through Marc Cuniberti and not affiliated with any RIA firm or entity.(530)559-1214
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