There are many other systems attempting to predict market movements. Like any other activity in areas dominated by luck and the unpredictable, like fishing and acting for instance, there is quite lot of superstition involved. People are ready to grasp at any apparent correlation, no matter how dubious.
So there is one theory that sunny weather produces optimism in people generally that is reflected in prices, and another view has it that the market index moves up and down with skirt hemlines. Another old adage was ‘sell in May and go away until St Leger’s Day’ on the assumption that everybody went away for the summer and returned for the popular horse race that marked the end of the summer lull – hence in the absence of trade, activity was listless and random. In fact any investigation shows the saying to have been unjustified when coined and becoming less reliable since.
Finally, be wary of buying on a tip or rumour. It is most unlikely you will be the first to hear it, even if it is true, and there is a very good chance it is unjustified gossip or a ‘ramp’ – somebody starting a story to shove up the price of shares he or she wants to sell. On the other hand, if it really is true and the information comes from someone on the inside, acting on it could land you in jail for insider trading.
One view holds that share selection is for the long term, so there is little point in reacting to every whim of stock market fashion. You bought for the long term, so hold on to the shares – an apparently sensible approach that can provide a useful overall guide but ignores the realities of life. For instance, the assumption that dictated the original decision may no longer apply – the company, the economy or the portfolio may have changed. So it is worth reviewing the decision from time to time.
Some of the guides to investment will say fatuous things like ‘sell your worst shares early’. But if it were easy to tell which the worst shares were, one would not be reading a book – just because a share has dropped and another risen does not mean they will continue in the same direction, as lots of price charts will clearly show. Some old market hands are always against buying a plunging share in the hope of recovery – ‘the market is trying to tell you something’ they say. But if, for instance, a share goes from 23p to £12.40 in the space of 18 months and then drops back to 60p in the next six months, when did the market get it right?
So there are no obvious answers. Anybody claiming to have a simple explanation is a fool or a liar. If it were that easy everybody would have done it long ago.
There are sophisticated mathematical modelling theories about what you should do. They are interesting, some have been programmed into computers, but none of them can be justified on any logical basis. One suggests selling shares after they have fallen 8 per cent; another says sell when they have dropped 7 per cent below the top price reached.