When I first started trading I believed that the best way to make money was to focus on making predictions. What was the market going to do in the months ahead? Which stocks are going to be the big winners? What events would occur to drive the action? If I could predict those things, then I was sure to become rich.
Over time I came to realize that not only was I unable to predict anything about the market very well, but no one else could either. There are always people that pound their chests and proudly claim that they made this incredible prescient call. Sometimes they actually do time things perfectly, but no one can do it consistently. Most people will be correct just often enough to be fooled into thinking that it is a product of their skill and insight rather than dumb luck.
The Problem With Predictions
Every day I read predictions that the market is going to sink to this level or boom to that level. What exactly are we supposed to do with those predictions? Position ourselves and then just sit and hope these brilliant predictions are correct?
Another problem with predictions is that they lead to inflexibility. Once we make a prediction, then we automatically create a bias. We lose some of our objectivity and will focus on the things that support our predictions and dismiss the things that don’t. No one likes to be wrong, and when you make predictions, you will likely play a number of emotional games to avoid it.
The most powerful thing you can do as a trader is to say, ‘I don’t know,’ and admit that you have absolutely no idea what the market is going to do in the months ahead. I may have some thoughts about what the market might do, and it can be helpful to consider various scenarios, but ultimately I just have to wait and see how events unfold.
By admitting that I don’t know what will happen, I am free to react to conditions as they change. I don’t have to struggle with the issue of being wrong. I just have to modify my behavior to deal with what is happening right now in front of my face.
One of the most nonsensical things in stock picking is price targets. Analyst coming up with price targets by using discounted cash flow and valuation metrics. Many analysts will lowball their targets so that they can raise them later if a company performs adequately and market conditions are favorable, but these numbers are generally quite arbitrary. Recently there have been hundreds of price target cuts for growth stocks simply because the discount rate has gone up due to inflationary pressures. What good were the original price targets to investors?
We are much better off simply calling a stock good or bad and forgetting the farce of predicting it is going to be a certain price at some distant point in time. The one great certainty about the stock market is change, and what looks good one day may easily look bad the next. Don’t let some arbitrary price target keep you stuck in a ‘bad’ stock. Pretending that we know how high it might go is just an exercise in ego and is far more likely to hurt your trading rather than help. Use analyst opinions for short-term trading purposes but otherwise ignore this form of prediction.
Free yourself from the tyranny of pretending you can predict the future. You can’t and won’t do it very well, and those that say they can are fooling themselves. When you stop playing the prediction game, then you are free to be a much more flexible and aggressive trader that reacts to conditions as they change. Learning how to aggressively trade what is happening right now will make you far more money than trying to predict what might happen months or years from now.