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Daily Traders Edge

Opinion: Winning investors know that stocks are money machines, not slot machines

June 05
10:44 2018

How do you make money in the stock market? Easy: Buy stocks before the market goes up; sell before the market goes down. All you need to do is predict whether the market is going up or down.

If only things were so perfect. But too many investors waste time and money trying to discover reliable patterns in the market. Here’s just a sampling of what people have tried:

• The market does well in years ending in 5: 2005, 2015.

• The market does well in years ending in 8: 2008, 2018

• The market does well in Dragon years in the Chinese calendar.

• A stock broker studied comic strips in a newspaper; another broker let his dog pick stocks.

• The Boston Snow (B.S.) indicator monitors snowfall in Boston on Christmas Eve.

• Chartists looking for support and resistance levels, “head and shoulders” patterns, and more.

• Inscrutable black-box algorithms mining for inexplicable patterns.

The problem is that while seductive patterns are easily found in past data, they have a nasty habit of disappearing just when we try to use them. They are a rear-view mirror when we need a crystal ball. Yet many investors remain hopeful that they will crack the “secrets” of the market.

There is a better way. The stock market is often compared to a casino. The market is like a casino in two important ways: the short-run outcomes are unpredictable, but the long-run results are a near-certainty.

Casino enthusiasts in Las Vegas, Atlantic City, and elsewhere look for streaks, overdue numbers, and more complicated patterns. One hapless gambler recorded the outcomes of 50,000 dice rolls at a Las Vegas casino and studied the sequences in which the numbers appeared. He found that the sequence 4–4–11 occurred 31 times, even though it was only expected to happen 20 times in 50,000 roles. He consequently advised betting on 11 whenever 4 came up twice in a row. He also found that on 10 of the 38 occasions when the sequence 7–12–7 occurred, the next number was either a 2, 3, or 12.

Continue Reading at Market Watch

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