According to the book, when the stock price started plunging, pretty much all evidence indicated that it probably wasn’t going to go up again.
Trouble is, such certainty is inherently impossible in the stock market. If the stock is certain not to go up, then there is no point holding it, which means that you should get rid of it—which means that everyone will sell it, causing it to plunge. But then shorting it becomes a certain killer investment. (And the same reasoning also works even if we only have a high probability rather than certainty, since lots of big investors with well-pooled risk will be attracted even if just the expected values are out of the ordinary in any direction.)
Generally speaking, it is a very close and safe approximation of reality to simply assume that any extraordinary future performance of any stock that would be implied by the public information, whether good or bad, automatically triggers reactions from investors that invalidate this prediction. Thus, if you’re going to gamble with single-stock investing, you may well just pick it randomly.
Kaj_Sotala:
Trouble is, such certainty is inherently impossible in the stock market. If the stock is certain not to go up, then there is no point holding it, which means that you should get rid of it—which means that everyone will sell it, causing it to plunge. But then shorting it becomes a certain killer investment. (And the same reasoning also works even if we only have a high probability rather than certainty, since lots of big investors with well-pooled risk will be attracted even if just the expected values are out of the ordinary in any direction.)
Generally speaking, it is a very close and safe approximation of reality to simply assume that any extraordinary future performance of any stock that would be implied by the public information, whether good or bad, automatically triggers reactions from investors that invalidate this prediction. Thus, if you’re going to gamble with single-stock investing, you may well just pick it randomly.