If you ask someone to guess how many jellybeans are in a jar, most of the time their guess isn't very accurate. But if you ask a large group of people to guess the number of jellybeans, their average answer is surprisingly accurate. This phenomenon is called the “Wisdom of the Crowd”, which basically means that the collective guess is almost always better than any one individual's guess. Most of you will probably find this to be obvious. Of course the crowd's average guess will be better! You are leveraging the collective wisdom of many people, why wouldn't they be better and more consistent than any single person?
If you understand the jellybean example, you're on your way to better understanding the stock market. Stock prices are set by two simultaneous transactions: a buy and a sell. Generally, buyers think that the stock price is going to up up, sellers think that the stock price is going to go down. Both buyers and sellers have access to the exact same information, but they are each making their guess at what will come next. Multiply this transaction a million times across a million buyers and sellers, and pretty quickly both buyers and sellers start to agree on a fair price. This is exactly the same as the jellybean example: some investors will lose and some will win, but average out the crowd's bets and you will almost certainly get closer to the truth than any single investor's guess. This is the Wisdom of the Crowd. All investors are looking at the same market information and stock prices, just as all jellybean counters are looking at the same jar of jellybeans. The current price of any stock has been set by the collective wisdom of the crowd. If the crowd looks at the market and starts to feel that prices are too low, they will buy up shares until the price reaches a point where the crowd doesn't feel that way anymore, and vice versa.
Now the strange part is that most of us would probably bet on the crowd's answer for counting jellybeans rather than on our own guess, but when it comes to investing, a significant number of investors suddenly seem to think they know better than the crowd. They pick individual stocks that they believe are undervalued (even though their current price has already been determined by many others to be fair). They go bearish based on news articles that everyone else has already seen, assuming that they alone are smart enough to know that the market has not efficiently priced that news in. They overweight their portfolios with different sectors, even buying options to leverage up their personal convictions. All because they believe that the crowd has guessed wrong. But if you believe in collective wisdom, there is no reason to assume that you will outperform the crowd through anything other than blind luck.
I hope that you will keep this analogy in mind next time you are trying to predict what is coming next in the market, especially if you are bearish (since the overall trend of the market is always up in the long term). Nobody knows for certain what will happen, but the crowd has done their very best to price stocks at a level where the probability of it going up or down is roughly equal. To go against this is to bet against the crowd, something that I don't think is wise in the long run. My recommendation is to go with the collective wisdom of the crowd and DCA into broad market index funds.
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