No matter how many books you read, podcasts you listen to, or websites you visit to learn the intricacies of the stock market, investing is a risky business. Earning a consistent return at a reasonable level of risk is not easy. So, can you really learn enough to make a success of investing in stocks?

The financial markets are in a constant state of flux. No matter how informed the investor, market uncertainty can never be eliminated completely.

The Barriers to Learning About Stocks

At almost any point in time, there will be pundits predicting that the market will go up or down. Additionally, the same sources of information may be used to draw these contradictory conclusions. Predictions are based on market behavior and human psychology, and no one can accurately predict what investors will do and how stocks will react. Thus, while no amount of knowledge can solve this problem, what individuals can do is study past events.

Stock Market Theory

There are reliable, consistent principles of asset allocation, arbitrage, short selling, and many other concepts and methods. However, a persistent problem with financial markets is that there are many unstable variables. With each situation, different factors play a role, and what worked or failed before, may now do the opposite.

Key Takeaways

  • Market movements are based on market behavior and human psychology, which cannot be predicted.
  • Investors can study past events; however, each situation is different, and what worked before may not work again.
  • Investing in the short term is riskier than investing for the long term where volatility can average out.
  • A portfolio should be diversified and regularly rebalanced.

Skill or Luck?

Learning the theory of the stock market is certainly a good place to start for beginner investors; however, it is also critical to recognize patterns of activity and behavior. Even with these skills, professional investors fail to make the right predictions, or they find themselves in the wrong market at the wrong time. Therefore, success with investing is a combination of knowledge, experience, and luck.

Consider the Time Horizon

Economists have long held opposing views. For example, neo-classicists believe in leaving the markets alone while Keynesians prefer to intervene in markets. There is no perfect approach to economic and financial issues that works every time.

However, the longer the time horizon, the easier it is to apply theory. Investing in the short term is more likely to be fraught with risk due to volatility than investing with a longer time horizon where the ups and downs average out.

Portfolio Diversification

An overarching rule for the new investor is to diversify an investment portfolio. The portfolio should be rebalanced regularly, and it should not be subject to excessive fees imposed by a portfolio manager.

The Bottom Line

While new investors should educate themselves as to the common mistakes that people make along with the scams and unscrupulous practices they may fall prey to, they should also understand that the market landscape is in a permanent state of flux. It's possible to minimize risks, but market uncertainty can never be eliminated completely.