Till today, and most probably going forward too, I would continue believing that it’s a waste of time to predict market movements. No one has been able to do it. And no one will be able to do it correctly on a regular basis. Warren Buffett has made a lot of money, but that is not because he is good at predictions. It is because he has some very strong mental systems and processes in place.
But I was just reading an article about political forecasting which made me question my prejudice about predictions. Please beware that I myself have made quite a few predictions in the past. Publically (2013, 2014) and privately. Some have helped me make money and others have taken it away from me. 😉
The question now is that is it possible to have a system for learning from market history that is not only programmed to avoid the most recent mistakes by companies, but also adapt the system to include learnings from current situations? Will we ever be able to push stock market forecasting ‘closer to what philosophers might call an optimal forecasting frontier? That an optimal forecasting frontier is a frontier along which you just can’t get any better.’
Predictions || Can You Do It?
Talking of stock market forecasting, there seems to be a systematic and fake overconfidence in the market forecasters. They think they know a lot more about future than they actually do. And the worst part is, when they say they’re 80 or 90 percent confident, the generally end up being 30-40% correct, which anyways is worse than a simple toss of coin.
But if we dig deeply, it is wrong to think that these people are in business of making accurate predictions. They’re in the business of flattering the prejudices of their base audience and they’re in the business of entertaining their base audience and accuracy is a side constraint. They don’t want to be caught in making an overt mistake so they generally are pretty skilful in avoiding being caught by using vague vocabulary to disguise their predictions. Also, these guys are here to make money at your expense. Period. They want you to trade as often as possible so that they can earn their living.
And I always feel that forecasters who are modest about their predictions are generally ones who have higher accuracy rates.
Coming back to the original discussion, we need to understand that to have a system of predicting with acceptable levels of accuracy, the big question is how to go about designing such a system? It would be a bad idea to take the best forecaster and submit his forecast’s as a system’s forecast. The system needs to be statistically more stable. Then the question arises as to how can one combine n number of individual predictions to become a part of an intelligent system? Can crowd’s intelligence be used to predict something as volatile as stock market movements?
A famous story will help you better visualize this concept of crowd intelligence –
There was a country fair in which 500 to 700 fair goers make a prediction about the weight of an ox. The estimated average prediction was 1,100. The individual predictions were between 300 and 8,000. Now when outliers were removed, the average came out to 1,103 and the true answer was 1,102. The average was far more accurate than all of the individuals from whom the average was derived.
Crowd Intelligence || Can We Predict Something, Together?
But for now, enough of this academic discussion. I will keep you posted in case I am able to design such a system 🙂
Let’s leave with what father of Value Investing, Benjamin Graham has to say about predictions. And I can bet that after you have read what is written below this sentence, you would feel that whatever you have read till now does not make any sense. 🙂
“The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking. Yet in many cases he pays attention to them and even acts upon them. Why? Because he has been persuaded that it is important for him to form some opinion of the future course of the stock market…. If you, the reader, expect to get rich over the years by following some system or leadership in market forecasting, you must be expecting to try to do what countless others are aiming at, and to be able to do it better than your numerous competitors in the market. There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he himself is a part.”
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