“Predictions” – Should we learn to predict ?

As human beings we have the unending urge to know the future. Many practitioners of predictions thrive because of our urge to know “what next”. Stock markets are no different when you talk of predictions. Many of my friends believe the predictions given by the specialists and take an effort to convince me to buy such ideas. A couple of weeks ago, I was told of a particular level NIFTY would break on the lower side and the individual said he was waiting to buy only if that happened. A few keep saying that it would take minimum three years for the economy to turn around post Covid-19. There are those who are very bullish too, and I am not ignoring them just because they are optimists !

Should we believe such predictions ? Or should you and I start predicting ? Especially as investors in the equity market shouldn’t we be worried about what future holds ?

In September 2011, Morgan Housel thus wrote on predictions…

We live in an unpredictable world, but this doesn’t stop experts from making divine forecasts.  Predictably their collective track records stink.  As Philip Tetlock, a U.C. Berkeley professor who studies expert predictions, put it, most experts could be beaten by a “dart throwing chimp”.  Yet we listen to them.  Intently.  With confidence.  Here are three predictions about the economy that never came to pass.

1).  1980s: Japan will take over the globeMichael Crichton – – not exactly an economic analyst, but widely read nonetheless – wrote in 1992 that “sooner or later, Americans must come to grips with the fact that Japan has become the leading industrial nation in the world.  The Japanese have the highest employment, highest literacy, the smallest gap between rich and poor.  Their manufactured goods have the highest quality.  They have the best food.  The fact is that a country the size of Montana, with half our population, will soon have an economy equal to ours.”

It never did.  These predictions weren’t just wrong.  They were the sheer opposite of what happened. It is now the most indebted industrialized nation in the world.

2). Every decade for almost a century:  The world will soon run out of oilIn 1914, the U.S Bureau of Mines predicted American oil reserves would be depleted in 10 years.  In 1939, the official prediction was 12 more years before the wells ran dry.  In 1951, the Department of Interior warned that we only had 13 years left.  Over and over again, experts have predicted the end of the oil.  Over and over again, they’ve been wrong.  

3).  2001:  The national debt will be repaid within a decadeIn 2001, President George W. Bush set a goal: “I hope you will join me to pay down $2 trillion in debt during the next 10 years”, he said.  Others were even more optimistic.  It was projected that the nation would effectively be debt-free by 2009.  But this never happened.  

This isn’t meant to point fingers.  It’s to accept that the experts whose predictions we rely so heavily on are fallible people operating in an unpredictable world.  The appeal of predictions is natural – who doesn’t want to know what the future holds? — but the collective track record of expert judgement speaks for itself.  Experts have been wrong in the past.  They’ll be wrong in the future.

I had highlighted this in our newsletter in May 2019 https://mailchi.mp/055d0ad805b3/elections-markets-predictions-you

This does not mean that there were no correct predictions. Google “successful predictions” and you get lot of links right from Nostradamus to the economic predictions of Alan Greenspan. What should you and I do then ?

Nassim Nicholas Taleb says “Do not predict but prepare”. He elaborates by saying “throw all your assumptions of yesterday and start afresh every day by asking right questions”. Ask whether the assumptions you held yesterday still hold true. Revisit the decisions of yesterday and check whether they need to be changed or not. That seems a better way to get ahead in life, isn’t it ?

If markets were to fall now, what would be the reasons ? Let us do a short thought experiment based on past data. Markets would fall if any one of the following or multiples were likely to occur…

  1. A high impact, non-financial event like war, elections, extreme weather, pandemic to name a few (that impacts economy in the medium to short term)
  2. Release of economic data that is confirming a gloomy picture ahead
  3. FIIs selling
  4. Quantitative tapering like what happened years after global financial crisis
  5. Liquidity squeeze
  6. Poor monsoon
  7. Other political reasons
  8. Global impact of a bad news in developed economies

Every day ask yourself whether any of these is a probable one. If not, keep watching the predictions of experts but do not act on them. I am not saying these are the only 8 triggers for markets to fall. Create your own list and keep building them based on your experience.

Conclusion : The world is more complex than what we think of. Nostradamus, Warren Buffett, Sachin Tendulkar are exceptions. We should not generalise based on exceptions. Many predictions would have come true if not with precision. But many more failed. Rather than relying on predictions of others, we should own our decisions by asking critical questions. If you are an investor, ask these questions and get them clarified with your advisor. If you are an advisor, ask these questions with your mentors and get insights. If a few could predict everything, life would be different !

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