Can you predict the direction of the stock market?

[i4value]

The stock market is made up of the better companies in an economy. An economy is essentially about the production of goods and services. In a market economy these are undertaken by companies.

So you would expect a good link between the direction of the stock market and the direction of the economy. The chart below shows the Malaysian GDP and the Bursa Malaysia index (KLCI)



You can see similar patterns.

So, if you have a long term investing horizon and you are confident in the economic growth of a country, you can make money just by buying the index of the stock exchange of that country.

Of course, if you want to beat the market, you have to pick stocks. Over the long term, stock prices reflect the business performance as illustrated by the chart below for a number of Bursa companies





So, can you make prediction about the direction of the stock market? YES, if you think long term and look at it from a fundamental perspective.

How can you make money? Wait for:

a) the country to have a temporary hiccups and buy the market index when the market reacts as it the country doesn’t have any more future

b) identify good companies that may be facing some temporary problems and buy when the market thinks that it is a dud.

Of course, it is a bit more complicated that what I have said as you will need the appropriate analytic skills. But it is not impossible.

For more investing insights go to “Investing for Value”