America is a great country, but the U.S. Constitution doesn’t guarantee always-rising markets. For those investors who are scared about the big drops and volatility that the stock market has been experiencing lately, I sat down and I wanted to write a reassuring message. I wanted to express my empathy. Somehow, I found that my reservoir of empathy was empty: After recent declines, the market is still up 20-something percent from the beginning of 2017.
And then I stumbled on Ray Dalio, the billionaire hedge fund manager at Bridgewater, and Michael Wilson, chief equity strategist at Morgan Stanley, predicting what the market will do next. I have to confess I started writing and could not stop. Here are the headlines that set me off:
- Ray Dalio: Cash on the sidelines will pour in to stem the bleeding in this market.
- Morgan Stanley's Wilson warns investors not to buy the dip.
Two contradictory headlines on the MarketWatch home page, right next to each other.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Do you listen to Dalio or Wilson? I want to let you in on a small Wall Street secret: Neither Dalio nor Wilson knows what the stock market will do next. Don’t be fooled by their fancy pedigrees, the gazillions of dollars they manage, the eloquence of their logic, the myriad data points they marshal. Nobody knows what the stock market will do tomorrow, next week or next year. Stock market behavior in the short term is completely random. Completely! You’ll have a better luck predicting the next card at a blackjack table than guessing what the stock market will do next.
The Problem with Stock Market Explanations
The media, of course, needs to fill pages and rack up views, and so there are a multitude of explanations for why the stock market does this or that. The explanations always sound rational, but for the most part they are worthless because they have zero forecasting power. For example:
- A strong jobs report sent stocks up. Explanation: The economy is doing great.
- A strong jobs report sent stocks down. Explanation: Investors are worried about higher interest rates.
I can give dual spin to any news, maybe only short of nuclear war.
My biggest problem with “The stock market will do this” headlines is that they turn investors into degenerate gamblers. I see people trying to treat the stock market like a casino. They get lucky at times and catch the wave of randomness (especially if the market marches higher every single day). Success goes to their heads. They feel like they’ve got this whole stock market thing figured out. Stocks are just bits of data that are priced on the exchanges.
This is not investing — I don’t even want to insult gambling by calling it gambling. At least gamblers don’t gamble with their life savings and 401(k)s (unless they are degenerate gamblers).
What will the stock market do next? That’s the wrong question. It’s the question that should never be asked, and if asked should never be answered. Asking this question shows that you believe there is some kind of order to this random madness. There is not. And if you answer with any answer other than “I don’t know,” you’re a liar.
What Investors Need to Do: Quit Gambling
How do you deal with market declines? Stop looking at the market as if it were a casino and start treating stocks as businesses that you are trying to buy at a discount to fair value. Stock price is an opinion of what the market is willing to pay for this business right now. Yes, it’s an opinion, not a final judgement. The stock market is going to be a miserable place for you in the long run if you take market opinions on any given day seriously and treat them as final judgements.
If you start treating stocks as businesses and you start analyzing them and valuing them as such, then market drops stop being a source of pain and turn into a source of pleasure. I’ve read somewhere that most money is made during bear markets (when you buy stocks on the cheap) – it just doesn’t feel that way at the time. Even if you are fully invested (we, at Investment Management Associates, are not) why does it really matter that the market decided to price your stocks lower today (unless you believe the market is right)? Will it matter three, five years from now? If you own undervalued companies, they may get more undervalued before they become fully valued. As long as you’ve got the valuation right, you’ll eventually be proven right.
Let me tell you what we did when the market took a dive. We looked at the stocks we own and asked ourselves a question: Had the intrinsic value that the companies represent changed? It had not. Then we asked if we wanted to increase our positions in any of them. Then we looked through our long watch list to see if any stocks had hit our buy-price targets.
That was it. That is the only rational way to invest.
-
Stocks Keep Climbing as Fed Meeting Nears: Stock Market TodayA stale inflation report and improving consumer sentiment did little to shift expectations for a rate cut next week.
-
Your End of Year Insurance Coverage Review ChecklistStop paying for insurance you don't need and close coverage gaps you didn't know about with this year-end insurance review.
-
Crypto Trends to Watch in 2026Cryptocurrency is still less than 20 years old, but it remains a fast-moving (and also maturing) market. Here are the crypto trends to watch for in 2026.
-
Time Is Running Out to Make the Best Moves to Save on Your 2025 TaxesDon't wait until January — investors, including those with a high net worth, can snag big tax savings for 2025 (and 2026) with these strategies.
-
4 Smart Ways Retirees Can Give More to Charity, From a Financial AdviserFor retirees, tax efficiency and charitable giving should go hand in hand. After all, why not maximize your gifts and minimize the amount that goes to the IRS?
-
I'm an Insurance Pro: If You Do One Boring Task Before the End of the Year, Make It This One (It Could Save You Thousands)Who wants to check insurance policies when there's fun to be had? Still, making sure everything is up to date (coverage and deductibles) can save you a ton.
-
3 Year-End Tax Strategies for Retirees With $2 Million to $10 MillionTo avoid the OBBB messing up your whole tax strategy, get your Roth conversions and charitable bunching done by year's end.
-
'Politics' Is a Dirty Word for Some Financial Advisers: 3 Reasons This Financial Planner Vehemently DisagreesYour financial plan should be aligned with your values and your politics. If your adviser refuses to talk about them, it's time to go elsewhere.
-
For a Move Abroad, Choosing a Fiduciary Financial Planner Who Sees Both Sides of the Border Is CriticalWorking with a cross-border financial planner is essential to integrate tax, estate and visa considerations and avoid costly, unexpected liabilities.
-
I'm a Financial Adviser: This Tax Trap Costs High Earners Thousands Each YearMutual funds in taxable accounts can quietly erode your returns. More efficient tools, such as ETFs and direct indexing, can help improve after-tax returns.
-
A Financial Adviser's Guide to Divorce Finalization: Tying Up the Loose EndsAfter signing the divorce agreement, you'll need to tackle the administrative work that will allow you to start over.
