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 make the mistake of saying, "The market is going down (or up)." Although it appears harmless, this statement implies that the direction of market prices is knowable. People making this statement often use it as the impetus for making investment decisions. Such decisions usually do not fare well, because they are based on the fallacy that one can predict the direction of future price movements. Investors can avoid this pitfall by understanding Eugene Fama's finding that security prices move in a random walk. At any point in time, we only know the current and past price of any given security. Where the price will be even a second later is unknown. The market continuously sets prices in response to news, which by its very nature is unpredictable. Investors will accomplish an important step when they can say, "the market has gone down (or up)" without even having to think about it.

Step 4Eugene Fama