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The Impossibility of Predicting the Market

9/15/2022

There are more possible outcomes for the market and economy than there are atoms on Earth.

Each time you shuffle a deck of 52 playing cards, it is a near certainty that no deck of cards has ever been arranged in that order in any point in history. Mathematicians explain that the number of possible arrangements of a deck of cards can be calculated by using the factorial of 52, which is the product of multiplying 52 by all of the integers smaller than 52.

The resulting number is very, very, very large, approximately 8 x 1067 (that is, an 8 with 67 zeroes). That number is so large that not only in the history of the world has a deck ever likely been shuffled the same way twice, but there are more possible arrangements of cards in a shuffled deck than there are atoms on earth or stars in the known galaxy.

Understanding the complex outcomes that can result from a simple task like shuffling a deck of cards can help investors who are seeking direction in the current market—or at least can explain somewhat the difficulty in getting a clear answer to the question, “Where is the market and economy headed?

StockCharts defines more than 20 market indicators that measure the health of stocks or groups of stocks (and these doesn’t include any of more than 60 technical indicators).

If economic data is what you seek, Moody’s lists on its website more than 80 economic indicators that it tracks for global economies. The Federal Reserve Bank of St. Louis publishes 817,409 data series related to global and domestic GDP, employment, population, industrial output, and more, for many regions, states, and countries, for many periods, adjusted and non-adjusted, estimated and actual.

With all of this data, economists can point with certainty to times in history where some element of the present economy behaved in much the same fashion.

Much less certain is the probability that at any point in history did the U.S. economy and markets behave in exactly (or nearly exactly) the same way as they are acting right now. In fact, it is highly unlikely that the U.S. has ever experienced the same confluence of economic, business, and market conditions as it is doing now in mid-2022.

This is why economists and market pundits are notoriously unable to consistently predict the direction of the markets and economy. If they employ a simplified set of indicators, they risk missing the factors that might change the balance overwhelmingly in one direction or another. If they try to utilize too many indicators, then they may get mired in an uninterpretable number of possible outcomes.

The impossibility of the task of market prognostication doesn’t change the number of commentators who will attempt to make a prediction. Any recent day’s headlines provide proof of this, with one commentator predicting a record-setting recession on the way and another forecasting that a recession is already nearly over. It would be funny if it weren’t so ridiculous.

For our part, we are content to leave the prophesizing to others, to build a portfolio that doesn’t demand change when markets or economies shift direction, and to remain patient in the face of the unpredictable. This is the only strategy that has proven suitable for investing through the generations, and we remain confident that identifying well-managed businesses is the secret sauce for a stock portfolio that will perform best over the long-term.

In this issue of the SmallCap Informer, we introduce two new companies. The first is a healthcare stock that works with other small biopharma businesses to deliver essential services. The second is a small gaming/resort business that is exceptionally well-managed, not only when compared to others in its industry but to other companies in our coverage list.

Stay the course!

  • DOUGLAS GERLACH

Read the complete commentary and profiles of our two recommended small company stocks in the September 2022 issue of the SmallCap Informer stock newsletter.

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