On Being Broadly Correct Rather Than Precisely Wrong - Views on News from Equitymaster

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The Equitymaster Research Digest

On Being Broadly Correct Rather Than Precisely Wrong
Oct 6, 2015

The profession of prediction is tricky. The consumers of predictions most often look for instant gratification. Unfortunately, it can become more important for the professional trader to look right rather than be right.

The talking heads on television predict everything about the next day that helps them look right.

Mirroring the sentiment of the market helps them appear right. Rarely does anyone bother to check the accuracy of the prediction the next day.

Traders and fund managers make decisions that make the current AUM (assets under management) or NAV (net asset value) look attractive. These numbers help them attract more clients and grow AUM. The ability of the fund to create wealth for investors over the long term is often neglected.

Bankers give out loans based on the current status of the borrowing company to stay ahead of competition. Taking a call on the cash flows and viability of say a Kingfisher Airline or a Deccan Chronicle a couple of years down the line is not always binding on their decision to lend.

Predictors go to great lengths to create an impression that appears right. Every impression has the potential to mislead investors.

The truth is that every decision based on predictions can be a double-edged sword. Legendry fund managers such as Howard Marks have dwelled on this in detail in their memos to investors. The skill of the investors lies in being broadly correct rather than being precisely wrong.

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