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  • CK Narayan

    Contributor, ET NOW
    Dr Narayan is a Dalal Street veteran and one of finest exponents of Technical Analysis in Indian financial markets. He has nearly four decades of experience and insights on Indian markets and is popular for his talk show, Talking Technicals, on ET Now. He is also Chief Mentor at ChartAdvise.

Market kya lagta hai? Why investors need predictions in stock market

After the great run of the market in 2015-2017, multibaggers became a rage.

Updated: Aug 01, 2019, 06.25 PM IST
Quarterly earnings estimates fall in this domain. When a forecast is almost equal to the actual number, everyone is happy.
The stock market runs on predictions. Most people don’t believe them but still, everyone wants them. The commonest query in the market between two people is Market kya lage? (What do you think of the market?). This is asking for a prediction, even if you don’t believe that the other man has the capability of making one or not.

With predictions come the next issue: do we believe them or not? It is quite relative, actually. For example, if you give a prediction that Sensex will top the 1,00,000 mark by 2030, most people won’t believe it. Not because it is impossible, but because we think predicting it is not possible by us and hence we conclude that the same is not possible by others.

However, if the forecast is for Nifty levels in two months, then there is a much greater chance of believing it because it is something that seems doable within our minds. Hence, it seems possible that others can do it too.

Now, whether we believe them or not (as being distinct from whether they are ‘believable’ or not) depends also on our own psyche at that time. The more you need the forecast to be correct, the greater will be the tendency to believe it. For example, if you are having a losing streak and find it necessary to make some money in the next set of trades, you will tend to believe the forecast that are made by someone for the short term. It’s because you have found yourself unable to do it, but know that it can be done. So anyone who comes along with a reasonable, plausible-sounding forecast would be believable. Hence, your need will make you believe it. But if there is no such need, then you may look at the forecast with a more discerning eye and sift through it in great detail before believing it.

The recent fad about value investing is a good example. After the great run of the market in 2015-2017, multibaggers became a rage. Everyone wanted to own multibaggers. No one had them, but everyone wanted them. So everyone was ready to believe any kind of story that talked about their success in creating multibaggers. Value investors from the past became instant heroes and icons, and everyone was talking about moats and quality and longevity of earnings.

It is because we ‘wanted’ to believe them so that we could make ourselves act like them.

This is one of the reasons people are willing to buy long-term forecasts based on fundamentals, but not based on technicals. There is a mistaken belief that fundamental factors do not change or are consistent enough for a forecast to come true. But as we have seen often, this is seldom the case.

Technical analysis makes predictions based on price action, which is supposed to be reactionary and hence not thought of as something that can pack anything other than short-term predictions of value. One of the differences between technical and fundamental analyses is that the latter misses the feelings of the person as it cannot be captured in the fundamental data sets.

However, technical analysis captures this, as feelings are captured in price changes. With some additional skill sets and tools, a good technical analyst can create long-term predictions, particularly about changes that can be expected. It is very hard for people to make this distinction because the visible stuff that happens in the world (i.e. fundamentals) is only a small fraction of the hidden stuff that goes on inside people’s heads. The former is easy to over-analyze, the latter is easy to ignore.

The next big thing about predictions is timing. Analysts have been calling a top of the US markets for the past decade and are still doing so as the indices chalk up new highs. Eventually, someone is going to be correct. I got my 2008 prediction correct, so to say, because I forecast, in November 2007, that the market was going to top. But it was not until January 8, 2008 that it did and it was not until April 2008 that it began to fall seriously.

So, even though the direction of the forecast was correct, it was still too many months ahead. Is that good enough? In hindsight, everything is. But how many can work with a forecast that doesn’t work immediately? Not too many, I would reckon. That is because we live in a world of predictions. Every day, you receive new forecasts that make you forget about the older ones you heard until something turns out to be right. But you get more focused on the so-called ‘correctness’ of the forecast and overlook the fact that it was off the mark for weeks and months!

Quarterly earnings estimates fall in this domain. When a forecast is almost equal to the actual number, everyone is happy. Even if it is in the ballpark, most people treat it as being okay. If the results are way out of what was predicted, then it is a ‘surprise’! Note, how the forecast is never called wrong! This is because we want and live with forecasts and predictions.

We simply cannot live without them. They lend a kind of meaning to our life, give it some direction, allow us to plan around them and perhaps even act on them.

So, however, right or wrong they may be, we do need them. At various points, analysts will be vilified or praised for their forecasts. That would depends much on the need to be correct. When times are tough, like they are now, you need a forecast and you need it to come good. So anyone who gets it right is a hero and those who get it wrong are jerks. Yet one good forecast and the analyst is back in business!

Bull markets are easier times for analysts because the market gets benevolent. It papers over the errors of analysts. But in bearish times, analysts have a tough time, as trends are unforgiving and also, people’s need for accuracy is much greater.

So if you are an analyst, be aggressive with your forecasts in bullish times and be circumspect during bearish times. Engage in doublespeak during tough times, so that you don’t get caught with a position and can always defend your forecast with ifs and buts that you had mentioned earlier! If you find someone who desperately needs your advice, don’t give it.

As an analyst, you are playing the probability game while the other person is playing a certainty game. You are bound to lose this one. Recipients of your forecast would judge it on a binary basis – right or wrong – depending on their need as well as the time window through which it is seen. Probability is never binary.

A final word on the subject and this is for the analysts, and not for the recipients. The time spent arriving at a forecast seldom has anything to do with the success of the forecast, especially in the stock market. One can predict the outcome of a sports event by looking at all the stats of the previous matches in full detail.

However, the market is not a liner thing, nor is it a fixed process, like sports. Surprise events do occur. Non-linear responses do occur. These may completely clobber the forecast, because these were never considered as factors when the forecast was arrived at!

Hence, never confuse the amount of work you have done to convince you that you are right. You can predict something, but never delude yourself that the market will do exactly what you think it will do with your prediction!
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of
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