The Short Term is Unpredictable
I try to base my investment decisions on what I see as the long-term trends. This is not because the short-term trends are unimportant, but because they are fundamentally unpredictable. If a person could predict a stock’s movement from minute to minute, that person could become rich within a few days, by selling just before the stock went down and buying before it went up. Everyone would like to be able to do this, but nobody can, because which way a stock moves over a few minutes is based on the unpredictable decisions of others, who are all trying to outsmart each other. Much the same can be said for day-to-day stock movement, and even, to a lesser degree, month-to-month movement.
My most basic belief about the stock market is that it is a chaotic manifestation of a chaotic world. In a sense it is chaos squared, because the actors are not little grains of sand being swept about in a tube of water, but are conscious and are making decisions for self-advantage, based on their observations of the chaos about them. Trying to predict the self interested decisions of others would be an exercise in futility, although behavioral analysis investing does this to some degree.
This is why it is important to stay humble when viewing the stock market and to refrain from imagining that it is possible to predict market movements in the short term. For every single stock in the stock market, the value of the stock at any moment is exactly what the consensus view of the most interested and moneyed investors believe it should be. There is no point, at least in the short term, trying to second guess this group, because they are smart and very knowledgeable about the stock.
So why invest?? First, if we have any money, then we must. Second, because even the smart and knowledgeable investors are smart and knowledgeable about what makes the most difference in the short term: The structure of a particular company, the immediate market environment for the products of that company, etc. They are not necessarily particularly knowledgeable about the world as a whole, and might not realize that forces brewing in some other part of the world will have a big effect on the company they know so well.
Having said all this, I was way too confident, back in September 2008 that the market would not go down to 7500 on the Dow. First off, I should have followed my own advice, realized that the short term is unpredictable and that therefore a severe market plunge was possible. Second, my model for government action was flawed. I always presume that the government will act to avert short term disaster, to support home-owners and to avoid wide-spread unemployment, because that is the way to woo voters and stay popular. Bush did not do these things and became extraordinarily unpopular in the bargain. Perhaps he just did not understand what it is that had to be done to achieve these goals. It is hard for me to understand, for example, why Bush did not move more aggressively to support the housing market. When Bush administration policy seemed to fly in the face of reason, such as supporting a strong dollar at just the time when export growth and import substitution was needed to pick up the slack from a lack of investment in housing, I figured that administration officials would soon see their errors and reverse course. That did not happen. Of course the most significant policy failure was the decision to let Lehman Brothers go under.
I still think that my model for government behavior is generally correct. I think that if Bush had realized how unpopular he would become and how he would cripple the Republican Party, he would have chosen policies that would have achieved his personal and political goals. I think that he just did not know how and did not know who to turn to, to help him out.