Why should you stay away from the forecasting circus of 2016

Nov 27, 2015

28

It is that time of the year when stock brokerages will start telling investors where do they see the Nifty and Sensex going in 2016. They had done a similar thing in 2015. And 2014. And 2013...In November-December 2014 many stock brokerages forecast that the Sensex would end above 30,000 points at the end of 2015. But where are we now, with a little over a month left for the year to end?

Forecasts go wrong all the time. In today's special edition of The Daily Reckoning, Rahul Shah, Equitymaster's Co-Head of Research, explains why following forecasts are a mug's game. Happy Reading!

Vivek Kaul
Editor,
The Daily Reckoning

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28

2015 is still a few weeks away from coming to a close. But the prediction game seems to have already begun. I am referring to the annual circus where the brightest minds in finance are asked to make one big prediction for the next year.

Last week, I came across the first such prediction exercise courtesy Bloomberg news. Apparently, some of the biggest names in finance came forward and offered their one big prediction for 2016.

The variety on offer was indeed huge. The predictions ranged from us being one big shock away from a global downturn to equities doing really well in 2016 to there finally being a recovery in the prices of natural resources.

Now, before you reach out for the article and start acting upon these forecasts, let me warn you to take them with a pinch of salt.

Forecasts in fields such as finance or economics have a terrible success rate. There are countless examples of people drawn to bankruptcy as a result of placing too much faith in forecasts.

However, the biggest bomb under the forecasting industry was planted by a gentleman called Philip Tetlock. After analysing close to 30,000 forecasts from close to 284 experts, he was forced to acknowledge that experts are terrible forecasters. Worse still, the average expert did only slightly better than random guessing.

Yet, forecasts are sought and given at the drop of a hat. What astonishes me further is that the forecasting industry, which has extremely poor results to show for the amount of money and resources that go into it, still continues to be a multibillion dollar industry.

While calling the bluff of the forecasting industry is fine, it leaves us with an interesting conundrum.

Take the case of investing. Forecasting has pathetic track record even for experts. Yet, investing requires building positions, which will be impacted by future events. But if expert advice is of little use, how do investors go about building positions?

Well, the way we go about it at Equitymaster is we are conscious of the fact that just as the future might bring in opportunities, it also poses a threat. In fact, we are more concerned about the threat than the opportunity. This way, we are more conservative in the way we value stocks and try to minimize permanent loss of capital as much as we can.

We don't bank too much on a rosy future. If the future brings in additional upside, well and good. But we won't price it in advance into our projections most of the time.

This safety first approach has served us really well over the years. And we believe it should do the same for you too should you start incorporating it into your investment process.

It will also do away with the need to follow those confident looking forecasters in the media whose forecasts go wrong much more often than they go right.


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Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Why should you stay away from the forecasting circus of 2016"

Asishkumar

Nov 30, 2015

Thank you.

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Equitymaster requests your view! Post a comment on "Why should you stay away from the forecasting circus of 2016". Click here!