Originally published in the Huffington Post, November 15, 2016
The harsh reality is no one can predict the future of stock prices.
Much of what you read in the financial media is errant nonsense, consisting of rank speculation about future events. Nowhere is this better illustrated than by the spate of silly articles “advising” investors what changes to make in their portfolio based on the results of the presidential election. Articles like “16 Best Stocks to Buy Under President Donald Trump” are illustrative.
Problems with predictions
There are many problems with adjusting your portfolio based on predictions about the future conduct of our new president. In order to do so with any probability of success, here’s what you would have to know:
- What the new president will actually do;
- What impact this conduct will have on a particular stock (or sector);
- Whether the predicted conduct and its effect have already been factored into the price of the stock.
There are many pundits eager to provide their insight. Unfortunately, few of them predicted Trump’s stunning upset. Undeterred by their failure to accurately predict Trump’s win, these same “experts” shamelessly ask you to rely on their predictions about random, future events.
Bad predictions from well-qualified “experts”
It gets worse.
An article dated November 3, 2016 published on cnbc.com discussed the predictions of “two economic professors” about how the stock market might react if Trump was elected. One predicted “a sharp immediate sell-off”.
The article noted, “strategists agree there would be a sell-off with a Trump win…” It also set forth the views of Ethan Harris, head of global economics at Bank of America Merrill Lynch. Mr. Harris said “he would expect a sell off if Trump wins…”
They were all dead wrong. Two days after the election, the Dow rose 218 points and closed at a record high for the second day in a row.
The harsh reality is no one can predict the future of stock prices. Those prices will be impacted by tomorrow’s news. None of the pundits can possibly know what that news will be.
Remember this before you buy or sell a stock based on someone’s prediction of future events. By some estimates, 100 million trades, of about 10 billion shares, take place every day in 45 countries around the world. There are about 5 million buyers and 5 million sellers involved in these trades.
If you are buying based on the prediction of a pundit (or your broker), someone else is selling. That person, who has access to the same publicly available information as you, believes it’s a good time to get out of the stock you want to buy. Why are you so confident your judgment is better than the person (or institution) on the other side of the trade?
Before you rely on anyone who purports to have the ability to predict the future, you should heed this sage advice from Warren Buffett:
“We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
Post-election “advice” about which stocks to buy and sell is nonsense. Ignore it.