the short view
Academic research claims that the best explanation for short-term stock price movements–meaning price changes over periods less than a month–is white noise. That is, you can safely ignore them as simply random deviations from a longer-term trend.
The result isn’t quite true, as the rise of computer-based algorithmic trading, which sifts through gigantic amounts of data and pounces on the tiniest arbitrage opportunities, shows. In addition, at least some experienced professionals, who carefully, and over long periods, observe the trading patterns of the stocks they own, develop a knack for identifying unusual price action that can have meaning.
But that’s not you and me. We’re not plugged directly into stock exchange trading computers (at least, I’m not), and we don’t spend our entire day watching a Bloomberg machine with peripheral vision while we process the thousands of pages of research material fed into our inboxes each morning.
We don’t have the computer power or the ultra-low commission structure to stand a chance against algorithmic traders. And, let’s face it, we have lives. We’re not going to devote the time needed to be a good short-term trader, even assuming we could match wits and reflexes with a seasoned professional.
Why, then, do all the commercials for discount brokers tout the supposedly fabulous trading tools they offer clients? …it’s because brokers make their money from trading. Whether our net worth rises or falls makes little difference to their bottom line.
the long view
To my mind, the best strategy for you and me is to have most of our money in index funds and to spend our research time looking for a few stocks that we can get to know very well as time passes, which have a solid growth story and which we can hold for three, or five, or ten years. An AAPL, in other words, or an AMZN, or a GOOG, or a DIS, or a SBUX.
In fact, many of such names are what are called “retail” stocks, meaning they are discovered and supported by the yous and mes of the world and only embraced by professionals when a steadily rising stock price forces them kicking and screaming, to examine the story.
Great post, and I completely agree with what you say. Many investors in the stock market would be way better off just investing into index funds and thoroughly analyzing very select few individual stocks. Thanks a lot for the article.