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Predicting Is NOT Investing (It’s Speculating) as Published in InsideNova.com

In a recent column, I covered why buying gold is more like speculating than investing. A pretty rock, gold doesn’t have or generate any intrinsic value other than what we humans are willing to shell out for it.

Today, I want to build on the notion of investing versus speculating. Even in our stock and bond markets, there are ways to be a speculator and ways to be an investor. Investors patiently participate in the market’s long-term expected growth. Speculators hope to “beat” the market by trying to predict its next moves.

What do I mean by that? 

Academic inquiry has helped us understand how stocks (or bonds or REIT funds, etc.) get priced: It’s the result of all participating investors’ collective decisions. For every investor who buys a security expecting the price to go up, there’s another investor who sells it, believing the price will go down. Every moment, as the news changes, so do investor perceptions, and so does the pricing. Messy? Yes! But also surprisingly efficient … and very hard for any one investor to consistently outmaneuver the market’s mechanisms.

What does this tell us about making near-term predictions? “Success” in this context depends on luck versus skill. That’s because a skillful “bet” would require knowing the unknowable … twice. First, you’d need to know what new information is about to be known. Second, you’d also need to accurately predict how the collective market will react to the unknown news.

This means it’s at least as difficult to play the financial prediction game as it is to correctly forecast our fickle NoVA weather. Fortunately, you don’t have to play to begin with. In fact, you shouldn’t. To participate in the market’s expected long-term returns: save some money, invest it according to your personal goals and risk tolerances, remain patiently disciplined and diversified, and ignore “experts” trying to distract you with their market-timing predictions.

Speaking of those “experts,” in my next post, I’ll explain why their predictions are no more dependable than yours.

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