PREDICTIONS AND WHY WE NEED THEM

Our market runs on predictions. Most people don’t believe them but still, everyone wants them. The commonest query in the market between two people is Market kya lage? (what do you think of the market?). This is asking for a prediction even if you don’t believe that the other man has capabilities of making one or not.

With the predictions come the next issue. Do we believe them or not? It is quite relative actually. For e.g. if you give a prediction for the market for year 2030 or for Sensex 1 lac etc. then most people don’t believe them. Not because they are not possible, but because we think they are not possible by us and hence we conclude that the same is not possible by others. However, if the forecast is for Nifty levels two months later then there is a much greater chance of believing it because it is something that seems doable within our own minds. Hence it seems possible that others can do it too.

Now, whether we believe them or not (as being distinct from whether they are ‘believable’ or not) depends also on our own psyche at that time. The more you need the forecast to be correct, the greater is the tendency to believe it. For e.g. if you are having a losing streak and find it necessary to make some money on the next set of trades, you will tend to believe the forecast that are made for the short term by someone. It is because you have found yourself unable to do it but know too that it can be done. So anyone who comes along with a reasonable, plausible sounding forecast looks believable. Hence your need will make you believe it. But if there is no such need, then you may look at the forecast with a lot more discerning eye and sift thru it a great deal more before believing it.

The recent fad about value investing is a good example. After the great run of the market in 2015-2017, multi baggers became the rage. Everyone wanted to own multi baggers. No one had them but everyone wanted them. So everyone was ready to believe any kind of story that talked about success in creating multi-baggers. Value investors from the past became instant heroes and icons and everyone was talking about moats and quality and longevity of earnings etc. It is because we ‘wanted’ to believe them so that we could make ourselves act like them too.

This is one of the reasons that people are willing to buy on long term forecasts based on fundamentals but not based on technical. There is a mistaken belief that fundamental factors don’t change or are consistent enough for the forecasts to come true. But as we have seen often, this is seldom the case. Technical analysis predicts based on price action- which is supposed to be reactionary and hence not thought of something that can pack anything other than short term predictions of value.  One of the differences between technical and fundamental analysis is that the latter misses the feelings of the person as this cannot be captured in the fundamental data sets. However, technical analysis captures this, as feelings are captured in the price changes. With some additional skill sets with the tools, a good technical analyst can create long term predictions, particularly about changes that can be expected.  It is very hard for people to make this distinction because the visible stuff that happens in the world (i.e. fundamentals) is a small fraction of the hidden stuff that goes on inside people’s heads. The former is easy to overanalyse; the latter is easy to ignore.

The next big thing about predictions is the timing. Analysts have been calling for the top of the US markets for the past decade and are still doing so as the indices chalk up new highs. Eventually someone is going to be correct. I got the 2008 prediction correct, so to say, because I forecasted, in Nov 2007, that the market was going to top. But it was not until Jan 8^th that it did and it was not until April 2008 that it began to fall seriously. So, even though the direction of the forecast was correct, it was still too many months ahead. So is that good enough? In hindsight everything is. But how many can work with a forecast that doesn’t work immediately? Not too many I would reckon. That is also because we live in a world of predictions. Every day you receive new forecasts that make you forget about the older one that you heard- until something turns out to be right. But you get more focused on the so called ‘ correctness’ of the forecast that you overlook the fact that it was weeks and months off the actual timing! Quarterly earnings estimates are in this area. When it is almost equal to the actual number, everyone is happy. But even if it is in the ball park, most people treat it as being OK. If the results are way out of what was predicted, then it is a “surprise”! Note, how the forecast is never called wrong! This is because we want and live in forecasts and predictions. We simply cannot live without them. They lend a kind of meaning to our lives, give it some direction, allows us to plan around them and perhaps even act on them.

So however is right or wrong they may be, we do need them. At various points analysts will be vilified or praised for their forecasts. That too depends much on the need to be correct. When times are tough, like they are now, you need a forecast and you need it to come good. So anyone who gets it right is a hero and those that get it wrong are jerks. But one good forecast and the analyst is back in business! Bull markets are easier time for analysts because the market is itself benevolent. It papers over the errors of analysts. But in bearish times, analysts have a tougher time as trends are unforgiving and also, people’s need for accuracy is much greater.

So if you are an analyst, be aggressive with your forecasts during bullish times and be circumspect during bearish times. Engage in doublespeak during tough times so that you don’t get caught out with a position and can always defend your forecast with ifs and buts that you had mentioned earlier! If you find someone desperately needs your advice, don’t give it to them. As an analyst, you are playing the probability game while the other person is playing a certainty game. You are bound to lose this one. Recipients of your forecast judge it in a binary basis- right or wrong- depending upon their need as well as the time window thru which it is seen. Probability is never binary.

A final word on the subject and this is for analysts themselves and not for the recipients. Time spent arriving at a forecast many times seldom has anything to do with the success of the forecast- especially in the markets. One can predict the outcome of a sports event by looking at all the stats of the previous matches in full detail. However, the market is not a liner item, not a fixed process, like sports are. Surprise events happen. Non-linear responses occur. These may completely clobber the forecast because these were never considered as factors when the forecast were arrived at! Hence never confuse the amount of work you have done to convince you that you are right. You can predict something- but never delude yourself that the market will do exactly what you think it will do with your prediction!