“Calling the market” is a seductive but potentially destructive activity for those who make a living by advising people about where and how to invest their money.

A few good calls on where the stock market is going can establish an advisor’s reputation for a decade or longer—if those calls happen to catch the attention of investors. But the funny thing is that among people who make a habit of calling the market, everybody has had at least a few good calls. The ones you never hear of just didn’t have the good fortune to get noticed by investors while making a good call.

Some of the most dangerous advisors you’ll ever find are those who have recently made a good stock market prediction or two, and are starting to believe in their own infallibility.

I recall one advisor (I won’t mention his name) who made a couple of widely discussed, highly accurate market calls in the late 1970s and early 1980s. Then he announced at a press conference that he had “…matured to the point where he would never again make a major market mistake.” It was the kiss of death.

He went on to stay bearish or pessimistic throughout much of the mid-1980s, when the market was soaring. He turned bullish again only in the summer of 1987, a couple of months before the October 1987 stock market crash. That may have stopped him in his tracks, but it has not prevented many other “soothsayers” from following in his footsteps over the years.

A few fortunate calls versus a stream of good advice

When you assess the opinions of anybody who supposedly has a knack for calling the market, you need to ascertain if the advisor’s reputation is based on a few good calls, or a stream of good advice over years or decades.

I always have an opinion on which way the market will move. But nobody calls it right every time. That’s why I always stress that opinions (mine or anybody else’s) should be at most a secondary part of the investment process.

Your primary goal should be to follow our three-pronged formula: invest mainly in well-established companies, spread your money out across most if not all of the five main economic sectors, and avoid stocks that are featured in the broker/media limelight.

You’ll still have plenty of decisions and judgment calls to make. But following the key points in our three-pronged formula will go a long way toward ensuring your success as an investor.

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members

Do you make decisions on buying or selling stocks based on whether you think the market is going to move up or down? Do you give any credence to stock market predictions? Can you think of specific predictions that were remarkably accurate—or horribly wrong?

Note: This article was originally published on August 16, 2012.