The Market is Forward Looking

If you’re going to succeed as an investor it’s crucial you understand the concept that financial markets are forward looking. This can’t-miss episode with Ben Felix is out now on our website, YouTube and all podcasting platforms—go check it out! https://thewealthybarber.com/podcast/ben-felix-a-deep-dive-into-the-world-of-investing-twb-podcast-5/

You and I have talked about, uh, the market being forward looking. And how that is not well understood by the general investing public. So not only explain what it means for the market to be forward looking, but what does that mean to the investors? Why do they have to understand that? 

Uh, the market is a prediction engine. It’s incorporating information that is available today, which everybody has like financial statements or something that happened in the news or whatever. So it’s taking that type of information, but it’s also taking expectations about the future into account when it, when assets are priced. So anything that could happen in the future. Should be in an efficient market reflected in in prices and there are different ways that you can look at that, uh and, and study that but in general it’s accepted that that the market is the market contains expectations about the future now that matters to investors because if you think you have information that will let you beat the market.

So if you think um NVIDIA is going to have really strong future earnings. For example, the market agrees with you. So you can’t just think it has it’s going to have really strong future earnings and therefore you should buy the stock. You have to have a more optimistic expectation than the market, And then you have to be right for it to work out. But for you to make that bet, you have to say, okay, the market’s pricing really high future earnings in for NVIDIA. I think it’s actually going to be better than what the market’s pricing. Now, if the market’s expectations for NVIDIA’s earnings end up being what the, what the actual earnings are in the future, Nvidia stock is going to return something in line with the amount of risk that you’re taking by owning the stock. If it has an earning surprise, if it does better than expected, that’s where you get a positive return. But, I mean, that’s, it’s, it’s all about expectation error and, and that’s really hard to get right.

And it’s interesting to me, how many of my friends, these are sharp, sharp friends, people who’ve been investing for a long, long time, still struggle with this. And so one of the companies they own will come out with quite positive news and the stock will go down. And they’ll phone me and say, I don’t, I don’t understand that. Well, it’s because the market expected even better news than that. In fact, NVIDIA is a stock that could be prone to that. It could have a very good quarter, but not to the level that people are anticipating and the stock would take a hit and often a very big hit because the growth rate is so baked in to the valuation that if the growth rate disappoints at all, in terms of future forecast, it can really hit the stock price, but my friends again, grapple with that tremendously. It’s, I guess, a tough concept for a lot of people without experience to get a hold of.