For most people the stock market is an enigma. It is a mystical creature that many have tried to tame, but very few have ever come close to succeeding. When you think you finally have a good understanding of how it works, the markets tends to turn around and slap you in the face. When the news is great it goes down and when the news is bad it surges higher. Only to turn around and repeat the sequence in the opposite direction. Leaving most people frustrated and without any sort of guidance.
Over the last 200 years hundreds of different approaches and analytical tools have been developed by people from all walks of life to try and predict the market. Everything from fundamental analysis to studying the planets/astrology, from complex mathematical formulas to technical analysis, from computerized trading to consulting fortune tellers, witchcraft, etc…. While many have claimed to figure it out, only a few have. Thus far I know of only two people who have been able to break the stock market code. From what I have seen their work proves it without any doubt.
The most prominent and the most accepted stock market theory today is called “Efficient Market Hypothesis”. The theory basically states that the overall stock market is efficient as it continuously and immediately discounts all available information. Under such circumstances it is impossible to outperform the market over an extended period of time. While loved by academia, this hypothesis is, for the most part, dismissed by true market practitioners.
Even the king of investing Warren Buffett has not only dismissed the theory by making a number of compelling arguments against it, but he has also proved without a shadow of a doubt that the stock market can be beat over an extended period of time. His investment returns prove that. In simple terms, just as the clock is right twice a day, so is the efficient market theory. The market is indeed efficient but only at various points and at various times as the overall stock market continues to oscillate up and down.
Since there is no real workable theory on how the stock market really works and since so many people have tried to figure it out in the past but have failed, is there any chance for us to understand it?
The answer is YES.
Not only to understand it, but predict it with great accuracy. That’s what this section of the book is all about. To take a completely unique look at the stock market from a different vantage point in order to finally understand how the stock market works. Further, such a view will allow us to understand why the market has behaved as it did in the past and it will allow us to predict what’s coming next. It goes without saying that having access to such knowledge can be incredibly valuable and profitable.
So, how does the stock market work?
First, you must understand something very important. If you look at any stock market chart you will see price (Y Axis) moving over time (X Axis) in 2 dimensions. In today’s analyst society all attention is given to the Y Axis or study of the price movements and very little (if any) attention to the study of time. Yet, the TIME is the most important element. .
…….to be continued….