Cocktail theory of stock market predictions and the “art “of successful forecasting

I’d love to be able to predict markets and anticipate recessions , but since that’s impossible I’m satisfied to search out profitable companies as Buffet is. I’ve made money even in lousy markets & vice versa . Several of my favourite ten naggers ( stocks that went up ten times ) made their biggest moves during bad markets.

Peter Lynch, America’s number 1 money manager

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

Warren Buffet

Economy , interest rates and stock market future cannot be predicted . Peter Lynch the legendry invester multiplied investors money by a factor of 27 in just 13 years ( 1977-1990 ) when he was running Fidelity’s Magellan fund . He writes in his book ‘One Up On Wall street’ that he was taken aback by the 1987 stock market crash. He says,” its not possible to accurately predict markets.Obviously you don’t have to be able to predict the stock market to make money in stocks or else I wouldn’t have made any money.”

The cocktail theory

Peter Lynch in an amusing way has described his own theory on market predictions that he named The Cocktail Theory :

Peter wrote that when the market has been down for some years and nobody expects it to rise, people are not interested in stocks. In such times when he attended parties and some one asked him about his occupation and when he told them that he managed an equity fund , they would politely wander away . They would prefer to talk with a dentist about plaque. Thats an indication that the market is soon going to go up. Lynch calls it stage 1

” In stage two they would talk a little bit with me , tell me how risky stocks are ; then they move to the dentist. The market is up 15 percent from stage 1 but few are paying attention.

In stage 3 with the market up 30 percent they all gather around me and ignore the dentist. They ask me which stocks to buy.

In stage 4 again they gather around me and tell me what stocks to buy , even the dentist gives me three or four tips and in the next few days I see that all his reccomended stocks have gone up . When neighbours tell me what to buy and I wish I had taken their advice its a sure sign that the market is going to tumble. “

Then Peter Lynch warns that : Do what you want with this Cocktail theory but don’t expect me to bet on this.

The Cockroach Theory

There is yet another theory , the cockroach theory for markets. It goes like this: This theory suggests that if there is a bad news emerging from a company or market , expect more to come. ( You will never see a cockroach alone , if you see one there will others around too. ). This is often true about good earnings reports too. If one semiconductor company reports good earnings , others companies will usually report similar good news.

The ‘ Fine Art ‘ of forecasting

Now a few lines on the art of forecasting. If you want to be a successful forecaster , forecast often. Some of your forecasts would surely come true then circulate these in your social media , your whatsapp groups. Don’t worry about those forecasts that did not come true , they would have already been forgotten. Some Newspaper Editors who have mastered the’ art’ of forecasting arrange their reporters to publish contradictory stories for example one reporter will forcast that Party XYZ will win the upcoming election and a second reporter that Party ABC will win. After the election they will publish : Our reporter so and so had correctly forecast the resut one week before the election.

Concluding Remarks

While its not possible to predict economy or stock market, its possible to predict a company’s future earnings to a great extent. Invest in companies not in stocks as the Gurus say.

I would like to end this post with a Warren Buffet quote : We have long felt the only value of stock forecasters is to make fortune tellers look good.

Author: Nadeem Aslam

I am an Engineer by Training. Have worked for different airlines as a flight crew ( Flight Engineer ). I have travelled a lot. I experienced living in different countries , Japan, Pakistan, U.K. and Canada. About me I was based in Japan in 1990's many of my colleagues were American and almost all of them were investing in American stocks. In fact they founded an investment club. I joined the club , we shared the knowledge and the books , magazines and other material. I have been investing since then. What is the Stocks , Finance and Beond ? The blog is to share the knowledge and my investment experience. Many of my friends and relatives ask me how to invest in stocks , about mutual funds etc.etc. I answer their questions and then one day I decided to share with every one who may be interested. I chose the name stocks , finance and beyond to include wide ranging topics such as saving , investing , personnel finance philanthropy. So that's how I came up with

One thought on “Cocktail theory of stock market predictions and the “art “of successful forecasting”

Leave a Reply

Your email address will not be published. Required fields are marked *