Kaisi Lagti hai market? The most asked question wherever we go and whenever we meet clients, Probably the most asked Question in connection with the Indian Stock Market, but does it even matter?
Most Investors Spend 90% of their time thinking the next 5 - 10% Index Move, while wealth is created only by investing for the long term and catching long term trends.
We all love forecasts and always look for bits and pieces of information which basically reinforces our hypothesis regarding the market.
This is what is called Confirmatory Bias and we all suffer from it.
The confirmatory bias forces you to seek out information that corresponds to your own point of view. If you're bullish on equities, you'll seek out analysts that echo your viewpoint, while conveniently ignoring the naysayers - and vice versa. You'll actively seek out magical clues, chart patterns, forecasts and other tit bits of information that bolster your confidence about your own opinions.
We all look for headlines,especially optimistic kinds that tend to make our theory look good and our investments safe.
The more jargon in the headline, the better it is. A random search on Google on market forecasts or market predictions will throw up headlines like the ones below :
- The stock market and stock mutual funds rallied big-time in March. The rebound left many stock fund managers with a Goldilocks stock market forecast for the balance of this year: not too hot, not too cold….
- Even as a full-blown recovery in earnings will be key for markets, many other risks seem to be abating for now….
- Call them guardedly optimistic or cautiously optimistic. Their stock market forecast calls for a much better 2019 than 2018 was.
- Marketsare set to open slightly higher on anticipated earnings….
- On the face of it, financial markets seem to sense trouble….
- Few experts see a recession, but signs of slowing economic growth are piling up….
- How will some macros play out, that will play a huge role in how stocks perform. Of all these factors, two stand out because of their unpredictability and consequences: Oil prices and interest rates…..
- Is the stock market correction of the past three months a harbinger of an awful year ahead, or a Launchpad for a new bull market….
- I would say market forces appear to be at an equilibrium. The global economy is slowing but not at risk of dipping into a recession in the near term. Still, the economy is not so strong that it's about to run off to the races, either…
- The market got a smaller lift from easing investor fears about a…( Fill in the Blanks as per your suitable reason…)Youmay have heard that term before, but you might not have been introduced to the most powerful indicators that are used by smart money who consistently predict market moves before the dumb money herd….
Neither here nor there, do they make any sense. I will say most headlines are guardedly optimistic or cautiously pessimistic, consume them as you wish.
Prediction comes from a Latin word, “praedicere”, which means make known beforehand. The human brain is very powerful but subject to limitations and commonly suffers from what is called a Cognitive bias, which is often a result of the brain's attempt to simplify information processing. We all hate uncertainty and like to identify a pattern and predict the outcomes.
Whenever any talk of predicting or forecasting the market comes up,
I ‘am always reminded of a story.
“It was autumn, and the Red Indians asked their New Chief if the winter was going to be cold or mild.
Since he was a Red Indian chief in a modern society, he didn’t have any idea about any trends or what the weather was going to be like.
Nevertheless, to be on the safe side, and to fulfill his duty, he replied to his Tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared.
After some days he got an idea, Being a practical leader,He went to the phone booth, called the National Weather Service and asked 'Is the coming winter going to be cold?'
'It looks like this winter is going to be quite cold indeed,' the weather man responded.
So the Chief went back to his people and told them to collect even more wood. A week later, he called the National Weather Service again. 'Is it going to be a very cold winter?'
'Yes,' the man at National Weather Service again replied, 'It's definitely going to be a very cold winter.'
The Chief again went back to his people and ordered them to collect every scrap of wood they could find.
Two weeks later, he called the National Weather Service again.
'Are you absolutely sure that the winter is going to be very cold?' 'Absolutely,' The man replied. 'It's going to be one of the coldest winters ever.'
'How can you be so sure?' the Chief asked.
The weatherman replied, 'The Red Indians are collecting wood like crazy.'
Doesn’t it sound too familiar, That is somewhat like how the markets are predicted albeit with a few disclaimers.
Before we discuss about the suitability of market forecasts, First, a caveat: The market cannot always be predicted, but can be predicted often enough.
In 1952, Harry Markowitz established the modern theory of finance. In 1990 he won the Nobel Prize for Economic Sciences for this work.
Part of the theoretical underpinnings of his work include what is called Efficient Market theory. By that, he meant that in the long run all securities are efficiently priced, and that any change in price was due to random fluctuations.
Under this theory the stock market is not predictable and you should know that all modern finance theory about the pricing of securities is based on this as a starting point.
To illustrate this point, let's assume that someone could predict the stock market, that someone would of course become fabulously rich.
Assuming that the secret formula they used to predict the market stayed secret, they could continue to exploit this ability for the foreseeable future.
But, if the secret somehow leaked out, soon everyone would be trying it, and soon market prices would reflect this. The underpriced securities would rise in price as everyone starting buying them, and overpriced securities will fall in value as everyone would try to sell them.
In effect, the advantage would melt away, and the predictability would be gone. This is precisely why, in the short term, the stock market is not predictable.
One of the bedrock assumptions of Efficient Market Theory is that investors are 100% rational, which is of course impossible for humans. The stock market is driven as much by emotion as it is by cold, hard analysis. This is another major factor that makes the market very difficult to predict, since it's very difficult to mathematically predict irrational human behavior when it comes to money.
Having said that though, the fact is that the market isn't 100% efficient. It's getting closer to being efficient all the time, and it's more efficient today than it was, say, 30 years ago, precisely because of the effect discussed earlier. But's there's still enough inefficiency out there for some people and organizations to exploit. This is exactly what hedge funds, algorithmic traders and high frequency traders try to do, and they are successful enough and most of them make a good living, some in fact make a very good living.
The movement of the Stock Market can be predicted somewhat by Technical Analysis.
The main two component of Technical Analysis are price and volume and on these two data points,the whole stock market may be predicted.
Stock Market movement is nothing but a mix and match of Mathematics and Human psychology; and Technical Analysis is all about these two attributes.
Every human in this world thinks alike and that gave birth to technical analysis.
The main two component of Technical Analysis are price and volume and on these two data points,the whole stock market may be predicted.
Stock Market movement is nothing but a mix and match of Mathematics and Human psychology; and Technical Analysis is all about these two attributes.
Every human in this world thinks alike and that gave birth to technical analysis.
Technical analysis relies on patterns and fractals on the price charts — price charts are created by human buying and selling activity, so everything that the whole world knows, collectively, about a given stock, is revealed by its price chart.
Certain patterns thus typically lead to predictable outcomes. So, while nothing in life (including the market) can be predicted with 100% certainty, it can (at times) be predicted with results that far exceed what can be achieved randomly.
Technical analysis works, and market prediction works, because the market is a construct of human nature, and humans acting collectively as a herd become somewhat predictable.
Is it an exact science? No, because human behavior is not an exact science and humans behave in a irrational manner especially when it comes to money.
Hence, the market is predictable only in terms of probabilities and trends.
No one can hold a crystal ball and no one will always be able to accurately predicting the market’s performance, it is not possible to predict what a stock price is going to be.
People with a good understanding of statistics and probabilities can easily understand why. Stock prices are time series generated by probability distributions. Trying to predict the next outcome of a distribution is pointless.
No serious trader tries to predict stock prices. Instead they place bets on the underlying distribution by either:
People with a good understanding of statistics and probabilities can easily understand why. Stock prices are time series generated by probability distributions. Trying to predict the next outcome of a distribution is pointless.
No serious trader tries to predict stock prices. Instead they place bets on the underlying distribution by either:
Modeling the underlying price distribution or related quantity (return, volume, volatility,...)
Making assumptions on the underlying distributions (i.e., using most technical indicators)
Let me give you an example. Imagine a water bottle factory. The water content of the bottles are normally distributed with mean 1000 ml (1 liter) and standard deviation 10ml.
This means that 95% of bottles contain between 980 ml and 1020 ml of water.
Now, a bottle comes out with content 1020 ml. I'm betting you the next bottle's content will be less. I'll pay you Rs100 if I'm wrong, but you'll pay me Rs 10 if I'm right. Do you take the bet?
(And if not, how much would I need to offer for you to take the bet?)
If you can answer this question you understand how traders trade.
This means that 95% of bottles contain between 980 ml and 1020 ml of water.
Now, a bottle comes out with content 1020 ml. I'm betting you the next bottle's content will be less. I'll pay you Rs100 if I'm wrong, but you'll pay me Rs 10 if I'm right. Do you take the bet?
(And if not, how much would I need to offer for you to take the bet?)
If you can answer this question you understand how traders trade.
No forecast are accurate and do not be misled by them, whoever may be the author. Be guided only by your goals and time horizon to the goals and you are more likely to achieve them.
A lot of investors have started calling us recently to ask whether they should invest more at this time. They are positive about the market as the market is on an upswing currently and touching new highs.
Our answer to them is Yes provided you have a long term view of at least five years to stay invested.
If you looking for making some Quick Money by investing at this point of time, then My Answer is NO
The very nature of the market is to remain Volatile... and it is going to remain Volatile forever. Every fall in the market is followed by a bounce back.
Historically, market falls are temporary and rise are gradual and permanent. Just to illustrate the structural upward bias of the Indian Stock Market, kindly check the chart below :
Think of year 2020, 2025, 2030 and beyond and you will not need any forecast and you will be able to keep the noise out of your mind.
In the end, our view remains, that the best we can do as investors is to develop an approach that is logical, repeatable, and practical amidst the face of future uncertainty.
Lets remember the famous quote by Mark Twain before we are guided by any forecast.
Consult your Investment advisor and achieve your financial goals.
Happy Investing!
Stay Blessed Forever
Sandeep Sahni
Note: All information provided in this blog is for educational purposes only and does not constitute any professional advice or service. Readers are requested to consult a financial advisor before investing as investments are subject to Market Risks.
About The author
Sandeep Sahni
Sandeep is an alum of IIM Lucknow with a Post Graduate Degree (MBA class of 1988). His also an alum of Shri Ram College of Commerce, Delhi University (B.Com. Hons. Class of 1985.)
Sandeep's investing experience and study of the Financial Markets spans over 30 years. He is based in Chandigarh and has been advising more than 500 clients across the globe on Financial Planning and Wealth Management.
He has promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul provides financial insights into the markets, economy and Investments. Whether you are new to the personal finance domain or a professional looking to make your money work for you, the Sahayak Gurukul blogs and workshops are curated to demystify investing, simplify complex personal finance topics and help investors make better decisions about their money.
Alongside, Sandeep conducts regular Investor Awareness Programs and workshops for Training of Mutual Fund Distributors, and workshops and seminars on Financial Planning for Corporate groups, Teachers, Doctors and Other professionals.
Through his interactions and workshops, Sandeep works towards breaking the myths and illusions about money and finance.
He also writes a well read blog;
He has also conducted presentations, workshops and guest lectures at Management institutes for students on Financial Planning and Wealth Creation.
He can be reached at:
+91-9888220088, 9814112988
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