No. It’s random in the short-run.
Here’s an analogy I use. Imagine you had a coin. 60% of the time it’ll land heads and 40% of the time it’ll land tails. If every time you predict heads, you’re going to do very well for yourself in the long run.
But that isn’t good enough for most people. Most people can’t stand the thought of being wrong 40% of the time. So sometimes they guess tails. And some people have had great success guessing tails. And they’ve written books about it and gone on T.V. They explain their complicated strategies and indicators and predictions. Millions of people buy into their advice and start guessing tails sometimes themselves.
Most of them end up losers, but defeat is a hard thing to admit. Especially when defeat doesn’t always mean losing money. Defeat just means not winning as much as a dominant strategy. So they come up with complex explanations as to why the results of their strategy wins less often than the simpler heads-only strategy.
If you’ve been using your head, you’ll understand that the coin is really the market in this analogy. Heads is assuming stocks will go up and tails is assuming stocks will go down. Stocks have mostly gone up over the last century (Whether or not it’s 60-40% Im not sure. I just pulled those numbers out of my tail.) If you set your out look to heads, then you’re going to do very well for yourself over the long term. The market’s returned about 10% a year, which means its doubles every 7 years or so on average. But if you sometimes go tails, then you might get lucky and beat the heads-only strategy, but more often than not you’ll be leaving money on the table. Reason being, the same indicators that caused you to be fearful at the top will cause you to be fearful at the bottom. So you may miss the correction, but you’ll also miss the bull run. To paraphrase Garth Brooks, I might have missed the pain, but I’d of had to of missed the dance.
UPDATE: I’m in the middle of reading a book by Hersh Shefrin named “Beyond Greed and Fear – Understanding Behavioral Finance and the Psychology of Investing” where he conducts a coin flip study on his MBA students. The results should amaze you. MBA’s Can’t Predict a Weighted Coin
Written in 2015