It’s Just the Way the Market Works!

Stocks move on future news:

The market is an information processing machine, and there is a lot of information to process. Journalists will tell you why and what it is, which may or may not be related. Think of the market as a random walk. It’s randomly moving around, digesting the news, and over time, earnings grow, and then the stocks go up, but nobody knows in advance which stocks will be the winners. And in reality, the returns of the market overall are the handful of stocks that have exceptional gains and have been basically the winners in the market.

Just think about this: the average stock does not do that well, but the reason the SP500 has gone up is because of a handful of exceptional companies (Amazon, Exxon, Apple, and more) each year or each decade. The winners dominate, but unfortunately, we don’t know them in advance, so we have to diversify.

The key to investing is to stay invested. It doesn’t matter what the market did yesterday, last month, last year, or last decade. The market has no memory. What does matter is the fact that you’ve invested so when the market goes up, you get the return. The temptation is to sit on the sidelines till the dust settles, then invest. But markets are always forward-looking — with no memory. When the dust settles, the market will likely be higher.

If there’s one thing you should know, it’s that nobody knows the future news. The market aggregates all forecasts of the market participants. We want to believe that someone has a “lock” on the future, but they don’t. You don’t need to be a good forecaster of future returns in the markets, you need to be invested and reap the benefits of global capitalism.

Markets are extremely competitive, and that is reflected in very tight bid-ask spreads — it is important to remember that there are no orphaned stocks. For every stock sold, someone takes the other side by buying it.

Since we don’t know what the next big winning or losing stocks will be, people should embrace uncertainty because that gives us returns. Anybody who tells you they know where the market is going doesn’t — it’s noise. I don’t know where it’s going today or tomorrow, but I do know history is the only thing we have. If you had invested your money in global stocks, over time, you were rewarded. We expect the future to be the same.

Uncertainty will always be a part of investing, and we should embrace it; Without uncertainty, our returns would be close to zero. Investors get paid for accepting future uncertainty, but we pursue these returns with academic and empirical data.

Jeff Holland headshot

Jeff Holland | VIAIV

Leave a Reply