How to Predict the Stock Market

Find your "inner investor"

Don’t you wish you knew? Do you think you (or I) should have seen this financial fiasco coming? I know that some people think so because I got one e-mail last week stating that exact thought.

Given where we are right now, I think this particular question is important, but not for the reasons you might expect.

It’s an important question because it forces us to define ourselves as investors or speculators — or something in between.

The type of investor who “could see this coming” is in fact a speculator. There is nothing wrong with being a speculator but it’s important to call a spade a spade. If you say you should have seen this coming you are saying that you should be able to forecast how certain events will impact the future as it relates to the stock market.

That’s what a speculator does. The person who could “see it coming” is the person who should have “seen it coming” in 2000 and that same person who should have “seen it going away” in 2003. If you speculate on the market getting out, you are obliged to speculate on getting back in.

So this issue is very instructive. It forces you and I to decide what kind of investors we want to be.

Having said this, I will admit that there are “speculators” and then there are “speculators.” Some speculate all the time and others do so less often. Some speculate on large amounts and others on small amounts. But if you base your investment on how you think some current event is going to impact the future, please understand that you are speculating.

Again, I have no problem with this — I do it at times myself. But it is very important to be crystal clear on what kind of investor you are so you know what to expect.

Here are some questions you can ask yourself when you’re thinking of how to predict the stock market:

1. Are you an investor or speculator?

Do you make investments based on current events or based on your long-term goals? Both have pros and cons. Which is the best way to protect your assets?

2. If you consider yourself an investor, don’t ever speculate.

This doesn’t mean you have to invest blindly or buy and hold your positions. You can use investment strategies that work that are market-sensitive. That means you invest when the market is strong and refrain from investing when the market is weak. Like everything else, it’s not perfect. But such systems may help you avoid catastrophic results.

3. If you consider yourself a speculator, stay ahead of the curve.

There will be times when you’ll get it wrong. That goes with the territory. You will get it wrong and it will cost you. If you can’t accept that, don’t speculate.

It’s really simple but oh-so-important. If you speculate, don’t expect to be right all the time. If you invest, you must expect to lose money sometimes also.

What are your thoughts? Are you an investor or speculator? Do you only speculate when “it’s a sure thing”? How has that worked for you? Can you accept the realities and downsides of being an investor?