Don Steinmann's Investment Tip of the Week

Don Steinmann's
Investment Tip of the Week

The Random Stock Market

Something I’ve heard time and again over the years. “The stock market is completely random”, or “It’s just gambling”. I’ve heard this from degreed professionals, including one CPA. I’ve even heard it from clients (which is kind of weird if you think about it). So I decided rather than just relying on vague platitudes I’d put it to the test. Note that the examples I’ve chosen are extreme. But if the stock market is random, it shouldn’t matter.

First I looked at all the stocks trading on major US exchanges over the last 6 years. I selected companies that had grown earnings every single year (which was tough in 2009 of course). Also that over the whole period earnings had more than doubled. There were only 37 companies that met that criteria. Now if the market is random, price movement of those stocks should have been all over the map. Some of them up, some of them down. Turns out that wasn’t the case. 35 of those 37 stocks were up at least 50%. The S&P 500 over the same period? Up 13%. So those stocks gained at least 4 times what the S&P 500 did over that period. The other 2 stocks were also up, though not as much. They’d both had huge gains in the 2001 to 2005 period. I think they kind of ‘borrowed’ from their future. Hmm. Is it coincidence?

Then I looked at the other side. I screened for stocks that had lost money every year since 2006. There were 99 of those. Since the market is random, most of those should have been up too right? No, of those 99 stocks, only 32 had any kind of gain. But still, 1/3 of them were up. However looking at the list of gainers, they were all either development stage biotech companies, development stage technology companies, or development stage mining companies. Development stage being the operative word. These were all companies that people still hoped they’d have the next big drug, or device or mine.

I think the evidence is pretty clear. Earnings determine how a stock will do. If a company makes money, the stock goes up. Even including the worst bear market in 40 years, stocks that increased earnings every year had the stock price increase, virtually without exception.

No, there is nothing random, and buying stocks is not a casino. Predicting which companies would do that in advance, is the hard part. But that doesn’t change the fact that there is a hard logic to stock prices. Profitable companies stock eventually goes up. Unprofitable companies stock eventually goes down.

Scroll to Top