Forecast gone wrong – once again!

Today P V Subramanyam posted on Facebook a comment on something he had posted last year.

Here are the two posts:

On 7th September 2015:

Shankar Sharma has called this a bear market..this means market has to drop 25% from here. So the sensex target should be 19000. Take care. 

PS: I am learning to write humor…

On 7th September 2016:

posted this a year back..no clue where is Shankar Sharma…but the sensex is not at 19000 for sure….

Just for records, Sensex closed at 28,978.02 points yesterday. It was at 24,893.81 points on 7th September 2015. So in the last year, it has risen by 16.41%. Does not look like a bear 😉

This is another case of a forecast going wrong. Why do the forecasters keep trying? Why do people keep listening and believing in these forecasts?

Well, there is a human tendency. There is an urge to know the future before it happens. However, it isn’t going to happen to anyone. Here is an excerpt from my book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”:

There are many small stories in the epic Mahabharata. In one such story, a beggar comes to the Pandavas asking for some help. They are in the midst of a discussion, and Yudhisthir, the elder brother, asks the person to come the next day. Hearing this, his younger sibling, Bheema reminds Yudhisthir of the audacity of assuming that he would be alive tomorrow. This story highlights the importance of understanding uncertainty associated with the future.

Humans have always wanted to know the future. Astrologers and weather forecasters are among the most popular ones who make a living from this need. Someone who can see the future is called a “visionary”. This need to know the future is present in the world of business and finance, too. There are large numbers of analysts and forecasters, who make a living – in fact, many make a killing. However, the track record of such forecasts is not as impressive as one would like.

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How long will the irrationality continue?

There are talks about the madness in the markets, very regularly. People keep asking how long can such madness continue. The rally in the Indian equity markets currently is no exception. The same applies to the US markets, too. The doomsayers have some very strong arguments. But then the bulls also don’t give up. They come up with their logical and equally vehement arguments.

So who will win the battle? Or should one say, who blinks first?

Lord Keynes is believed to have said, “Markets can remain irrational for longer than you can remain solvent.” Often, we hear the argument that, all works out in the long term. Another superb quote attributed to Lord Keynes is related to the “long term”. He is believed to have said, “In the long run, we all are dead.”

For an investor, it is important to be right while one is alive – both biologically as well as financially.

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Easy money

When easy money becomes available, investors tend to take more risks with money that would otherwise lie idle.

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Believe in predictions?

When you look at predictions, please remember that even a broken clock shows correct time twice a day.

Check the track record of the forecaster and you would be amazed at the results …

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Simplify …

Most financial products have seen complexity rising over the years. As we spend some time in the financial services, there is an itch for innovating. many innovations end up as complexities. Now a research conducted in the US finds that majority of consumers choose the wrong plan for their financial and health needs because they do not understand basic health insurance concepts. The study recommends standardisation and simplification of health insurance plans.

In the absence of any regulation doing so, at least the consumers should stick to simple plans – to what they understand – be it health insurance or investment products. Simple is beautiful, at least it is less risky.

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11 times in 18 months …

In September 1998, Kothari Pioneer launched a new scheme – a sector fund, Kothari Pioneer Infotech Fund. By February 2000, i.e. within 18 months, the NAV had multiplied close to 11 times.

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Lessons from a Ponzi scheme in Finland

In Finland, a company called Wincapita operated from 2003 to 2008 in Finland, defrauding more than 10,000 victims – about 0.2% of Finland’s population – of approximately 100 million euros.

Here is a post regarding the study conducted by someone on the scheme, seems like the first of its kind.

Some interesting findings and my views on the same are as under:

  • A specific feature of Wincapita is that investors could join only by invitation from a sponsor.
    • Many fall prey to such a scheme, as “exclusivity” is so tempting that the brain stops thinking.
    • We don’t want to lose out on such an “exclusive” scheme
    • The word “exclusive” along with invitation from someone you knew massages the ego and makes one feel special. Ego is the enemy
  • Rantala studied the relationship of personal characteristics between sponsors and invitees. He found that invitees invested more if their sponsors had higher income, were older or more educated.
    • Higher income, more education and old age are not equal to better financial decisions. I have come across many investors in India, too who think that such traits make one a better investor.
    • The Ponzi scheme operators rely on such behavioural traits of masses and employ employees that look educated, smart and are well-groomed and confident – traits many equate with financial savviness.
  • Rantala said. “When information comes from a friend, it overrides safety mechanisms.”
    • This can’t get more ridiculous
    • Trust is surely built on the integrity, but the other and equally important leg of the same is the ability or skills or competence. The best of the friends may be able to offer an honest opinion without any axe to grind, but will he or she be able to offer an informed opinion?
    • In any financial matter, remember while taking someone’s opinion – you need both integrity and competence.

The book’s chapter titled “The Pied Piper” starts with the following line:

“How easily the masses have been led astray” – wrote Charles Mackay in his 1841 classic, “Extraordinary Popular Delusions and the Madness of Crowds”

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