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The Forecast Is Not the Reality
Apr 23, 2018

The moment I saw news about the Indian Meteorological Department's (IMD) rainfall forecast last week, my instant reflex was to find out how accurate the IMD had been in forecasting rainfall in the past.

You see, as a value-focused equity analyst I am conditioned to look at historical data.

Be it the weathermen, or a stock idea, I refuse to take forecasts and predictions for granted.

As far as the IMD's track record is concerned, the results are in front of you.

You can clearly see the gap between the forecasts and the reality. During some years, the gap is indeed quite wide.

So, one thing is certain - you cannot take the forecasts too seriously.

But don't get me wrong. I don't mean to discredit the IMD's efforts.

I look at weather forecasts just the way I look at economic and stock market forecasts.

You see, both the economy and the weather are very complex and dynamic systems. There are so many variables working together, that even a small variance in some of them can produce a completely unexpected outcome.

So, what should you do when dealing with such complex systems like the economy and stock markets?

I believe, the safest method is to always insist on a margin of safety.

Then, even if the outcome is lower than forecasted, you will still be better off.

That dear reader, is the path of investing safely in the stock market.

Data Source: CMIE

This Chart Of The Day was published in The 5 Minute WrapUp - This 500-Year Old Story Can Help You Become a Better Investor

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