Make No Predictions of Markets Over Short Periods of Time

By: Joe Morgan

Jun 9, 2022 | StocksStock Portfolio

Stock prices are determined by buyers and sellers, of course, but those buyers and sellers are entirely human. And humans are filled with emotions. We don’t know when it happens, but we know that markets can be driven entirely by emotions too as humans let their less rational side take over.

This means markets and stock prices can rise and fall a great amount from day to day. If the price of Microsoft drops 5% in a day does that really mean the company itself is worth 5% less today versus yesterday?

I would argue no, that cannot be the case.

Instead, what is happening is the human interpretation of Microsoft’s value is fluctuating from day to day. This is something no one can predict, even if they knew the facts of the future.

COVID, for Example

If you had known back in early 2020 that the economy would shut down and that so many businesses would be affected in the way they were, would you have predicted the stock market to drop by 34% over 35 days and then increase by 28% over the next 50 days? I doubt you would have – but that’s exactly what happened.

We can never know what the markets will do over the short term because they are entirely dependent on human interpretation of actual events. And human emotions are impossible to forecast.

Here’s this week’s Best Financial Life tip of the week: Make No Predictions of Markets Over Short Periods of Time.

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