Where Is the Stock Market Going to Go From Here? - Smart Contrarian by Equitymaster
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Where Is the Stock Market Going to Go From Here?

Nov 10, 2017

Rahul Shah, Editor, Smart Contrarian

With the BSE Sensex tipping the scales at well over 33,000 these days, that's the hot question of the moment.

Where is the stock market going to go from here?

And you're likely searching for the answer too. Especially if you're looking to invest money in the stock market today.

So, does the blistering rise in the markets mean with momentum behind it, it can only rise further?

Or does it mean that the rise in the markets have left it overstretched and fatigued, making it poised for a big fall?

Do You Feel Crushed in a Stampede of Bulls and Bears?

There's two ways to answer this question.

The first and most popular way is to focus on where the markets are headed next. If your focus is on figuring this out, you'll have to first tackle questions like:

Is the economy going to improve from here, or fall further?

Are corporate earnings going to get better?

Is the global economy looking up?

Will the commodity cycle turn for the better or worse?

What will China do next?

Will all the cheap money sloshing around tighten now?

Where are interest rates going?

Come 2019, will the incumbent government remain or change?

Best of luck answering these questions. Because, whether you make or lose money depends on whether you're right about them.

So, what do I think will happen?

I don't know.

My thoughts are perfectly encapsulated in what Warren Buffett once said about this subject, "Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future."

Which takes me to the second way of answering the question.

And that is to focus instead on where the markets are currently. And to have sensible pre-defined standards in place that guide you to structure your portfolio perfectly to suit the markets exactly as they are.

Sounds complex? But it's actually really simple.

As things stand today, the Sensex' price to earnings (PE) is 24.5x. This means the markets are much too expensive. Your corpus then, should be tilted away from stocks towards bonds. When the markets are cheap, the portfolio seesaws in the opposite direction.

This is an approach I have used to beat the market two and a half times over. My Benjamin Graham inspired service Microcap Millionaires takes precisely such an approach to stocks. And it tells investors exactly what to do with their corpus at any given time to make the best of the stock market without playing the futile prediction game.

This is, I believe, the best approach to ride on any potential gains, while protecting yourself from potential losses, considering the way the odds are stacked up in the markets right now.

Good investing,

Rahul Shah (Research Analyst)
Editor, Smart Contrarian

Editor's Note: There is, as you may know by now, another way to play the markets right now. And that's combining the wisdom of value investing, with the technical precision of trading. It's an innovative strategy, one that has proved profitable, over and over. It closes in two days, so check it out now.

Brain Food for the Day

Humans or Systems: Who Should You Trust?

Let's face it. We humans come up short when it comes to predicting the future.

We tend to work very well in simple situations. But we find the going tough when things get complex.

Investing is no different.

When you invest in a stock, you're taking a positive view about its future. But who has seen the future? No one knows what might happen.

Even 'experts' predict no better than random guesses. A few years ago, a study was done to test the accuracy of the predictions of about 300 experts.

What was the outcome? Well, the average expert was only slightly better than a dart-throwing monkey. In fact, a simple strategy of 'predicting no change always' would have done better than their forecasts.

The stock market is a very complex creature. Millions have been poured into the effort of predicting the future of the stock market. Still, an expert view is no better than that of a rank novice.

What about individual stocks?

Is it possible to do away with predictions?


Enter...system-based investing.

System-based investing does not rely on human judgement every time a stock needs to be bought and sold.

Instead, it relies on pre-determined buy and sell limits. It takes the emotional element out of equation.

It requires only one assumption - that there will always be recurring bouts of optimism and pessimism in the markets.

A system with pre-determined buy and sell limits, operating under this one assumption, can often do a much better job than most investors.

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