Going or Gone?

When discussing the direction of the market, it’s important to use the past-tense verb. During times of high market volatility, people commonly err by saying, “The market is going down or going up.” Although it appears innocuous, this statement implies that the future direction of market prices is knowable. These statements serve as the impetus for rash investment decisions. Such decisions usually do not fare well, because they are based on the fallacy that one can predict future price movements. Investors can avoid this pitfall by understanding Eugene Fama’s finding that security prices move in a random walk. At all times, we only know the current and past price of any security. Where the price will be even a second later is unknown. The market continuously sets prices in response to news, which by its nature is unpredictable. Investors will serve themselves well by being able to say “the market has gone down or has gone up” without even having to think about it.

Step 4Eugene Fama