Posted 05 January 2003 - 04:26 AM
If professional economists can’t predict economies and professional forecasters can’t predict markets, then what chance does the amateur investor have? Well, just go to a “cocktail party” for your market forecasting. Just stand in the middle of living room or near punch bowls, listening to what the nearest ten people are saying about stocks.
In the first stage of an upward market-one that has been down awhile and that nobody expects to rise again-people aren’t talking about stocks. In fact, if they lumber up to ask you what you do for a living, tell them you manage an equity mutual fund, and they will nod politely and wander away. If they don’t wander away, then they quickly change the subject to the Celtics Game, the upcoming elections, or the weather. Soon they are talking to a nearby dentist about plaque.
When ten people would rather talk to a dentist about plaque than to the manager of an equity mutual fund about stocks, it’s likely that the market is about to turn up.
In stage two, the new acquaintances linger a bit longer-perhaps long enough to tell you how risky the stock market is-before they move over to talk to the dentist. The cocktail party talk is still more about plaque than about stocks. The market’s up 15 percent from stage one, but few are paying attention.
In stage three, with the market up 30 percent from stage one, a crowd of interested parties ignores the dentist and circles around you all evening. A succession of enthusiastic individuals takes you aside to ask what stocks they should buy. Even the dentist is asking you what stocks he should buy. Everybody at the party has put money into one issue or another, and they’re all discussing what’s happened.
In stage four, once again they’re crowded around you-but this time it’s to tell you what stocks you should buy. Even the dentist has three or four tips, and in the next few days you look up his recommendations in the newspaper and they’ve all gone up. When the neighbors tell you what to buy and then you wish you had taken their advice, it’s a sure sign that the market has reached a top and is due for a tumble.