When it comes to the world of investments, we are presented with many paradoxes. One of these is the fact that, although there is an enormous body of literature out there, in the form of books, web sites, videos, podcasts, magazines, television programs and so on, investing remains a tricky business, fraught with dangers and risks of various kinds. It is just not easy to earn a consistently good return at a reasonable level of risk without something or other going wrong at various times.
All of this raises a fundamental question — what and how much can one really learn about the stock market?
The Barriers to Learning About Stocks
At almost any point in time, there are some people who claim that the markets will go up and others who claim that it will drop, while others say it will move sideways. Furthermore, the same sources of information may be used to draw these contradictory conclusions. This means that one has to be very careful about "knowledge" of any kind about the stock market, or other investment markets.
There is no doubt that it is hard to learn anything reliable and consistent about the daily (or short-term) ups and downs of the markets. One can only really meaningfully learn about something that is stable enough to get a metaphorical grip on. For instance, there is no problem learning a foreign language, the principles of mathematics or even those of economics. Of course, these fields develop over time, but there is a body of knowledge that is there to stay and you can learn it.
This applies only to a limited extent for the stock market. There are reliable, consistent principles of asset allocation and arbitrage, short selling and many other basic, intermediate and advanced concepts and methods. Stocks themselves are theoretical entities that are not much different than they were decades (or even centuries) ago. Human psychology has also been pretty constant over the ages — not that this makes it any easier to deal with people.
What Really Matters
The problem is that there is an awful lot that is not stable. In particular, identical starting situations for investments can, at different points in time, lead to completely different constellations of factors and results. With each situation, different aspects dominate, and what worked or failed before, may now do the opposite.
This means that what really matters is experience, skill and plain luck. Learning the "theory" is indispensable as a starting point, but from there you need to develop a feel for real-life situations and learn to recognize patterns of activity and behavior, as well as how they interact with one another.
Even so, in the investment scene, such experience and expertise is not necessarily reliable, which explains why even the best pros fail horribly from time to time. Such patterns of failure can also apply to people who are really well-educated and informed, but simply in the wrong market at the wrong time.
Knowledge is absolute (right or wrong), but experience is relative to other people and to a particular situation. Furthermore, we do not know where our knowledge begins and ends. And most importantly, we do not know what we do not know.
Know the Limitations
The economy is and has always been characterized by unresolved issues and diametrically opposing views. For example, neo-classicists are keen on markets and leaving them alone. Keynesians, by direct contrast, like to intervene in markets.
Reducing unemployment is equally fraught with controversy. Some policies and situations certainly raise unemployment, and others reduce it, but when there is 10 percent unemployment in a country, there is no panacea for getting is safely back down to three percent.
To cut to the chase, there is no clear right and wrong on such issues, no approach to economic and financial issues that works perfectly at all times. The result is that economists are always fiddling around trying to get things right, and often getting it wrong. This means one can certainly learn about the controversy, but not the one right way, which simply does not exist.
The longer the time horizon, the more the theory applies. While even this is not failsafe, it is clear that the shorter the time horizon, the more unpredictable the people, events and investments.
The other thing we can rely on is that something that is truly and pervasively illogical can be excluded. Note that we are not talking about irrationality – that certainly happens all the time. People do get carried away and take foolish risks. But illogical is something else. For example, if someone asks for a low-risk investment, they will not knowingly agree to a high-risk one. That is illogical and won't happen. In the same vein, people make mistakes, but they do not deliberately do things that cannot realistically pay off and that are doomed from the start.
There are a lot of things that are never a good idea. Investment portfolios should always be properly diversified, rebalanced regularly, not excessively cost-heavy and so on. There are many dos and don'ts that can save you from disaster.
There are also people who are unethical and dishonest. Sadly, we can rely on that too, but we can learn to spot the evildoers, up to a point. The problem is that new technology and ideas invariably lead to new rackets, scams and forms of misselling.
We can rely on the vast theoretical body of investment knowledge, but we need to know its limitations. We can figure out what to avoid and what should work. But there is nothing and no one out there who can tell us what will work.
The Bottom Line
The literature in all its forms enables us to avoid various classic and less classic mistakes. However, it is not infallible. There are always new mistakes to be made and people who want to rip us off in new ways. The essential point is that one can learn a lot, but not everything, and the investment landscape is in a permanent state of flux.
What matters is developing greater self-insight and knowing the limitations of what one can really learn and find out. General, specific and current knowledge are all indispensable. But equally, one needs to be aware that investments still entail a variable degree of uncertainty and luck. One can learn to optimize risk and minimize both mistakes and uncertainty, but the latter can never be eliminated.
(Check out our Investing Tutorials – Basics section to learn more about all things finance.)