Predicting Market Moves Is Worthless Without These Two Other Skills

Predictions about the stock market are easy. There are thousands of them made on a daily basis. Sometimes they are right, and quite often, they are wrong.

Since financial media try to communicate interesting information quickly, much of the stories and videos we see are predictions about what will happen next. There is a steady parade of pundits who will discuss why the market is going to go up or down.

Unfortunately, the average investor has embraced the idea that great investing is all about making predictions. Just make a prediction, put your money on the line and wait for it to happen. This passive approach to the market is really just a form of gambling.

What is missing? Strategy and tactics. If you are going to make predictions about the market, then you have to have a strategy to benefit from your prescience, and you must have tactics so that you can respond as market conditions shift.

Strategy is the plan that will help you profit from your predictions, and tactics are the individual steps and actions that will get you there.

Let’s say you think the market has hit bottom and is going to start a strong uptrend that will last months. That is a prediction, and it is totally useless unless you have some strategy and tactics in mind to profit from it.

If you have read my columns over the years, it should be very evident that I have a very low opinion of stock market predictions. There is no proof that anyone can consistently predict the future. The business media constantly promotes this stuff, and there are pundits that make a good living selling their predictions, but it just isn’t a good way for the average person to make money in the market, because the prediction is nothing but hope and a dream. Without strategy and tactics, you have no control over the situation.

Using a military analogy, a common prediction might be “we will win the war.” Maybe, but without a strategy and tactics, it is a totally worthless statement. How will the war be won? How will we make money if we are bullish or bearish?

Let’s say that you are predicting that the market has hit significant support and is likely to commence an uptrend that will last months. That is the easy part. Now you must formulate a strategy and develop tactics to profit from that prediction.

A common military phrase is, “Think strategically and act tactically.” How do you benefit from your bullish view? Buy index funds, specific sectors, or individual stocks? Once you figure out a general strategic plan for how you benefit from your prediction, then the hard work of actually putting it into action takes place. That is tactic.

The tactics of implementing a strategy are the nuts and bolts. I’m going to buy this stock at these points, set stops at this level, and look to take profits here. If my strategy doesn’t work, then my tactics to escape the situation will be to admit defeat at this point and move on.

What is important to note here is that instead of just hoping that a prediction turns out to be correct, you have taken control of the situation with your strategy and tactics. You are in a position to adjust as conditions change and evolve. You are now longer at the mercy of hopes and dreams. The initial prediction that you made no longer matters. All that matters is that you implement your strategy and tactics.

In the “Art of War,” Sun Tzu wrote, “Strategy without tactics is the slowest route to victory. Tactics without strategy are the noise before defeat.”

I would add that predictions without strategy and tactics are nothing but hope.