Nobody has a crystal ball, and for all their "science" you would think anybody who read a finance book or listened to the analysts on the internet would be rich. There are only theories out there in the finance world, nothing fully proven. The worst part about it is there are always contradicting theories, one professional will say the market is going up, the other professional will say it is going down. What are some of these theories in which they base their predictions on?
Fundamental Analysts – Expert Stock Picking: They use real data to evaluate the intrinsic value of a security, they believe by looking at financial statements of a company and plugging numbers into a formula they can somehow derive what a company is worth and find the ones that our undervalued. The problem with this: These analysts use numbers that are available to everyone else i.e. sales, cash flow, dividends, etc. Now with this information available to everybody how is it that so few have succeeded in “out-performing” the market. Problem #2: the stock market is affected by so many external factors outside of the company’s control, i.e. Europe’s debt and how it affects a declining stock markets can’t be found in Walmart’s balance sheet.
Technical Analysts – Expert Market Timing: They use historical data and statistics generated by market movements to try and predict future patterns. They disregard what a company is intrinsically worth and attempt to predict the markets activity. The problem with this: companies can outperform in a market, or can be uncorrelated, meaning that while the market as a whole might decline a successful company can still be profitable.
Efficient Market Hypothesis: It is impossible to “beat the market” because stock markets always incorporate and reflect all relevant information made available. Weaker forms of the theory suggests that only those who have “non-public” information can outperform consistently. Fortunately or unfortunately the government has made the latter statement illegal.
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