Short and medium term markets are driven by so many variables that neither you nor I can predict them with any accuracy or consistency. Both of which are necessary for such predictions to be useful to an investor.
In fact, it is an important step for the sophisticated investor to recognise their own limitations and to understand that the odds are stacked against them if they wish to get ahead of the markets in this way.
Long term markets, that is, the behaviour of a share price over 10-20 years, are far easier however to speculate upon. This is why they are the best place for beginner investors and traders to start making consistent returns.
Successfully run companies that achieve great profits and invest in their own growth generally increase investor demand for their shares. The fundamental laws of economics tell us that the higher the demand and lower the supply (because people are buying them) the higher the price will go. There is rarely a sustained and significant rush for the shares of a company that are shrinking and losing money each year. Supply becomes abundant as investors wish to offload what they have in these companies, and there is less demand, driving prices lower.
However, those companies that are growing and achieving great numbers, and continue to do so over the next 10 years can almost certainly expect to see greater demand for their shares over a 10 year period. History tells us this has been so for hundreds of years. It is very rare that a great company that does all the right things see their share price fall over such length of time. Indeed, it is hard to think of any company where this has happened, although I’m sure there must be one or two exceptions to the rule, of course.
Instead of focusing our efforts on matters we cannot control, like attempting to understand the behaviour of share prices over the next hour, day or week, I prefer to focus on matters I can control. Such as researching which of the 1000 or so FTSE companies are achieving great results and practicing the correct behaviours that encourage further company growth. Instead of pure speculation on process over a very short space a of time, where the odds of our success are low, it makes more sense for 90% of investors to speculate over the long term based on facts and evidence, where success rates can be very high.
There are a number of signs that exist that a company is likely to see further success and therefore raise demand for their stock in the future. These signs are financial, cultural, strategic and industrial. It is the utilisation of these signs, obtained by research and analysis, that help us identify the right companies to invest in over the next 10-20 years.
Over the years I have studied such signs and carefully formulated my own distinct approach for identifying potential growth stocks, which has over the last 8 years produced very favourable results, even in years like 2020.
I am content in the knowledge that whilst my approach cannot identify every stock that will rise significantly over the next decade (for there are other factors at work that can manipulate share prices beyond my understanding or appetite for attention), it does help ensure that I am placing my capital into companies with wonderful odds of producing significant returns over the years. Missing a big winner because of a human driven bubble, or a sudden product that took the world by storm is not something I concern myself with. For the stock did not have great odds of achieving that result, even though they did. Following such a reckless strategy may pay off once in every 15 investments, however the failure from the other 14 would almost certainly render me unprofitable over the long term. It makes much more sense to me to stick to those companies with high odds of returns, rather than outright gamble and hope to hit a big winner once in a while.