Can the Stock Market be predicted?

Source: http://faganasset.com

The stock market has the power to make a man millions in a minute or the potential to plummet a country into depression. When one thinks of the stock market they typically think of an opportunity to make cash but, how exactly can we predict which stocks to buy and which to short?

Although it's not possible to predict the future there are some methods that can be used in order to make the best guess.  Through these four methods written by Tristan Yates, an investor will have the best chance of getting high returns on his or her investments. One great way to find out is an article on a well known and reliable stock market website known as Investopedia. The article was written by Tristan Yates and is titled 4 ways the market can be predicted.

In this article Yates explains "There are two prices that are critical for any investor to know: the current price of the investment he or she owns, or plans to own, and its future selling price." Let's start here. Obviously the current price of a stock is the basis of any investment. An investor doesn't want to overpay for a stock that they don't know very much about. This leads to the second part. Yates also explains that it's very important to know the future price of a stock. I know what you're thinking: How am i supposed to know the future price of a stock? To answer that we need to look into the past and ask a single question. What does the history of this stock look like? Yates cites a 1993 study by Narasimhan Jagadeesh and Sheridan Titman and explains that "they found that stocks that have performed well during the past few months, are more likely to continue their out performance next month. The inverse also applies; stocks that have performed poorly, are more likely to continue their poor performance." To put this into more simple terms; if the stock shows a steady growth rate then, now may be a good time to buy however, if a stock shows a declining growth now may not be a good time to buy. Or is it?

This isn't normally how people make millions on the market. There is a different more risky way that Yates cites in his article known as value investing. Yates writes "In 1965, Paul Samuelson studied market returns and found that past pricing trends had no effect on future prices and reasoned that in an efficient market, there should be no such effect. His conclusion was that market prices are martingales." In a way both are right. The study in 1993 concluded that the most reliable stocks to buy are the ones which have a steady increase in price during the past few months which is very valid. However, the saying "high risk high reward" applies very much so in the study in 1965. What we still have to discuss is the process known as value investing which although is incredibly risky, is the way people make millions. In value investing investors look for a stock that is "underpriced" maybe a pharmaceutical company's earnings announcement says that they had a high quarterly earning. This is a green light for investing in that company. Since typical pharmaceuticals are very cheap a price change by as much as a quarter can make thousands of dollars. This of course comes with the risk that if a company had poor earnings and one was to invest in it they would loose a large sum of their investment. But, after decades of the brightest minds trying to answer this question they've found that exactly predicting the market is not possible. One can only predict what is going to happen based on facts they already have.

This raises a question: Historically, how bad has the stock market performed? How did this affect the overall economy?