Do you know the future?

It amazes me how frequently the same questions keep coming back.

Some of the most common questions are:

  • “Which mutual fund schemes are the best according to you?”
  • “Which is the best mutual fund? Or best stock? Or best investment?”
  • “What is your view on the market?”
  • “Should I invest now or wait for some time?”
  • “I have invested in ********* mutual fund scheme(s). How much returns should I expect?”
  • “I have invested in ********* mutual fund scheme(s). Are these good schemes or do I need to make any changes?”

All the above questions have one thing in common – an attempt to know the future. It seems the entire business of investment management may be about predicting the future. And the investment expert is a professional forecaster.

The fact is, most have failed to correctly predict the future events – even the best of the investors. Let us see some examples and we need not go too far in the past. In the last seven months of the year 2016, the world witnessed three major events taking place in three different parts of the world.

First in the month of June, the people of Britain voted for exiting the Eurozone during the referendum, whereas majority had predicted that Britain would remain in the Eurozone.

On November 8, while many experts were expecting the US to get the first ever lady President, the result was very different.

In both the above cases, while there were only two possibilities, the actual result was exactly opposite of the popular opinion.

On the other side of the world, on the same day, November 8th, the currency notes of Rs. 500 and Rs. 1,000 were pulled out of circulation. I am sure nobody had any idea about this. No forecaster could predict such an event happening.

Continue further on the US election results, majority of the market experts and economists had expected that a Trump victory would spell disaster for the US. What happened in reality? Post the announcement of election results; the US Dollar has gained against almost all major currencies of the world. Can someone say that the fall of the Dollar was already factored in the price and hence post the victory of Donald Trump, the Dollar only recovered? Well, even that argument does not hold water, since majority was of the view that Hillary Clinton would win the election. There was no question of the unexpected being factored in the price. So, it was not a case of a political forecast gone wrong, but also a market forecast going wrong.

Sir John Templeton has famously said, “Buy value, not market trends or the economic outlook.”

The subject of investment management for most retail individual investors is to ensure enough money is available at the time of one’s life’s financial goals. In such a scenario, one must manage the investment risks such that the money becomes available at the time of need.

For that purpose, the important thing is to understand what can go wrong and how to protect one’s investments. Forecasting the future is not required.

  • Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

#RidingTheRollerCoaster

Advertisements

Grexit – Brexit – Rexit – Investorexit

Last year, it was all about whether Greece would continue to remain a part of Eurozone. The event (or the speculation of the event), popularly known as Grexit caused a lot of anxiety in the financial markets the world over. Around this time last year, people started forgetting the same.

This year, we are struggling with another speculation – Brexit. Will Britain exit Eurozone?  While the decision is yet to be taken about the same, the markets are already nervous.

And while the world was debating about Brexit, we got a different exit, this time from a central banker. The Governor of Reserve Bank of India, Mr. Raghuram Rajan announced on Friday last week that he would go back to academia once his current term as Governor RBI gets over in September 2016.

We were very quick to coin the term for this exit – Rexit.

See the pattern – all these words sound so similar: Grexit – Brexit – Rexit. Our brains start to interpret such events as having similar outcomes. Read one of our blog posts on similar lines. Grouping the investment themes – a mental short cut. We love to take mental short cuts.

Biology says, the brain uses maximum energy and hence tries to conserve the same by taking short cuts.

Such short cuts invoke a fear and Grexit – BrexitRexit may trigger Investorexit from the markets.

Go back and read the blog we just referred to.

#RidingTheRollerCoaster – 186