Predicting the Market Bottom - An Exercise in Futility ?

With the recent unprecedented volatility dogging the stock markets around the globe, and with the economic crisis fully under-way, more and more people have been congregating together to ask the mother of all stock market questions - where will the market bottom be ? To expand this question a little, it's actually a little more complex, being divided into events like "where will the bottom be", "when will it happen", "will there be another bottom" and the no-brainer "have we already missed the bottom and the boat has left" ?

Interestingly, there are no lack of experts and market analysts making predictions on the stock market, as they have been doing for the past few decades. The funny thing is that when retail investors jump in to offer their "psychic" views on what's going to be happen, then it gets truly hilarious. Everyone knows that market bottoms cannot be timed, yet people persist in trying. There is something perverse about human beings that likes to make simple things complex; and this is about one of the most complex things one can ever attempt to achieve. As mentioned, the stock market is a complex adaptive system, which means that there are a myriad of factors which determine how prices move on any given day, and thus far there is no predictable pattern for these random movements. Yet, almost everyone loves to chip in to try to predict what's going to happen next, and where the market is going to go. It's becoming a national pastime, akin to a game show, where people try to outdo and outsmart one another to be the first to "guess" the right answer. It strikes me as being silly and a waste of effort. Why ? Read on.....

The point of investing is to ensure one gets a fair return on his investment in sound companies over time. The purpose of a stock market is for companies to float their shares so as to raise funds for business expansion. Most people seem to have forgotten the two golden rules above, which is why the stock market has turned into a game, a contest and to some, a sort of battleground to test their wits and dexterity. I must emphasize that my view of the stock market is one whereby I can park my money in shares belonging to a good company which can grow steadily over the years, and eventually my stake in the company will be worth more by virtue of its business growth. This represents a way for the retail investor to grow his money in a slow and steady way. The problem is that many people are impatient for quick gains and thus engage in the speculative "game" of market timing, which ultimately results in futility as their efforts to discern patterns in stock prices usually end in failure.

Trying to pick a bottom in the stock market is the same as trying to guess when the top is here (in a bull market) so that you will know when to sell out all your shares and stay in 100% cash. There are a few flaws to this logic which many people do not notice:-

1) Assuming the bottom is coming (i.e. not here yet), how can one devise a way to properly anticipate this and be able time it exactly so that one can purchase shares at the bottom ?

2) Assuming the bottom has already past, many people will still be waiting for the bottom to arrive so that they can buy at lower prices; while the stock market may just march onwards and leave them in the cold;

3) The bottom for the stock index may not always signal a bottom for individual stock prices; so one who tracks the index closely looking for a bottom may fail to capture appropriate opportunities in individual securities as he too focused on the forest to notice the trees;

4) "Hindsight Investing", the bane of market timers, always results in one thinking that he will know exactly when to sell out and exactly when to buy back. I need not say too much more about this as I have often mentioned how silly a concept hindsight investing is.

5) Pattern-seeking human beings will always discern patterns in past data, clearly because they are available and not because they form any part of a larger picture of what's going to occur in the future. Correlation is not equal to causation; and what caused a market bottom in previous cycles may not always lead to one in the current cycle, as each economic crisis is different. So people who postulate based on past data are simply trying to anchor their expectations of the future based on information which may not be representative of what's currently going on.

The conclusion to all this rambling is that market timing is simply an exercise in futility, and my advice to readers would be to conveniently ignore the bunch of forecasters and analysts out there who are forever trying to predict the bottom. Time can be spent more constructively on sieving out good bargains in terms of corporate valuations in the current bearish environment instead of reading tons of commentaries by "experts" and "gurus" who think they know better. Thinking indepedently is one of the traits of a successful investor, but at the same time, be open to opinions about your companies which are objective and may be of value to your assessment of a company's potential.