Isn’t this we always wanted to do? Correctly predicting stock market movements? Just imagine what would happen if we were able to do so 90% of the time.
We would become part of a really rich community of people.
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.’
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| 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.
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| Crowd Intelligence || Can We Predict Something, Together? |
Personally, I am quite confident that it is highly unlikely that such a system can be made anytime soon. I have been a proponent of a small system of evaluating overall market valuation by using P/E Ratio, P/BV Ratio and Dividend Yields. But this one particular approach can just be one spoke of a larger ‘complete’ system of predicting. And who knows that the system being discussed might also use some technical indicators like 200 Day Moving Average.
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.”
Do share your thoughts / predictions…
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Predictions are a dicey business.
A good understanding of probability, probability distributions (esp fat tails) and some scenario modeling (like Monte Carlo) would likely provide a better insight into how things have fared in the past – and that is a good starting point for the future.
IMHO, best way for investors would be to run simulations using historical fundamental data under various assumptions, and not trying to generalize results – investors should train themselves to accept and embrace various ranges of outcomes under varying conditions. The key is not to predict 🙂
This will not only help in developing “nerves of steel” when markets gyrate, but may also help in developing “non-predictive” strategies – and ultimately help in overcoming being “fooled by randomness” as Shri Taleb so aptly summarizes in his classic text.
Really well said Subhodeep. 🙂 And you have summed it up brilliantly with 'The key is not to predict'
I predict that… the market will fluctuate.
And I also predict that the above prediction will never go wrong except on holidays 🙂
Bang on target.
And cant be wrong about that. 🙂
astrology can do
Fundamentals (What), Technical (When)
Powerful Technical Analysis has capability to read fundamental signals from chart of couple of years of stock.
I love playing with numbers as I am experienced computer programmer & I know well that mathematics has enough power to calculate almost what we can think of.. further everything is game of numbers, say chemistry, IT, biology, physics, astrology… everything needs mathematics to get final touch.. stock market shouldn’t be exception to use power of mathematics on available data to prediction enough (> 70%) to make good wealth. Stock fundamental analysis also depends on numbers of balance-sheets. 🙂
In this era computers where we are controlling satellites, robots, health equipment, driver-less car, artificial intelligence, big-data (mass movement studies) and much more…
NOTING IS IMPOSSIBLE (I m POSSIBLE)
I think in this digital age Investor should think out of box.. Fundamental analysis will no longer get preference to technical analysis in coming years using power of computing.. Technical analysis needs mathematician and most financial advisers are not mathematicians so prefer fundamental over technical, most successful investor books are written by investors who has developed their strategies using fundamental analysis before many decades when computers where infants..
We all knows there are many good young investors are there now who have started their investment journey and they will be more popular then past ace investors names..
we should think out-of-box (not limit ourselves to fundamental and operators/adviser tips).
Charts are visual representation of moments, accurate measurement of Fear (Sell), Greed (Buy), Growth (Trend), Demand (Volume), etc..
For me everything is possible but yes, not all can predict market movements.
Investor (short or long term) need to remain isolated from noise. In current days 99% rumors and 1% knowledge cannot win the game.
Investor having right approach/strategy has won many games. Those have tried to disclosed their secret secrets but 99% lost in tons of rumors.
Simple combination science, art and physiological knowledge can make investor wealthy.