Murky World of Stock Forecast

by Dhirendra Kumar
“We’ve long felt that only value of the stock forecasters is to make fortune tellers look good.” – Warren Buffett
Yesterday, on a TV show on Doordarshan in which I was appearing, a viewer called in and asked why stock analysts were wrong seven times out of ten. He also asked what would happen in the market in the coming week, which answered his first question, or rather, made it clear why his first question was irrelevant.

It’s not possible to predict what happens in the market in the short-term. Yet, all kinds of media, especially the business TV channels work hard to maintain the illusion that this is not only possible, but routine. To explain how this illusion is maintained, let me tell you an old Wall Street joke about how someone built up a reputation of being a great analyst.

A broker sent a letter to a thousand people, telling half of them a certain stock would rise in the coming week and the other half that it would fall. Next week, he wrote another letter, but only to the five hundred to whom he had chanced to send the correct prediction the previous week. Again, he told half of them that the stock would rise and the other half that it would fall. After repeating this exercise for six weeks, he had a residual audience of about thirty people with whom he had built up an impeccable reputation of correctly predicting a stock’s movements for six weeks running. And then, I assume, he proceeded to milk these people in some way. Of course, in the age of the Internet, it’s possible to do this on a scale of millions.

While this is (I hope) just a joke, a variation on this theme has become the bread and butter of modern business media. This is what happens: a lot of experts say a lot of things. Mostly, they earnestly try and make intelligent predictions. Most of the times a majority of them are wrong but some are correct. Sometimes, when the markets are in a less than normal phase of unpredictability, a larger proportion is correct.

All this activity keeps much of the audience under the vague impression that it is possible to predict things correctly because, after all, someone or the other is always right on at least some of the things, some of the time. Then, investors take this belief in the short-term predictability of the market and try and get advice on their own investment. The individual investor who gets burned always concludes that he did not get the right advice. He never stumbles upon the correct explanation, which is that if you want short-term predictions that are guaranteed to be correct, then such a thing as the ‘right advice’ does not exist.

For your short-term investments, you can get advice that has a hundred per cent chance of being correct one per cent of the time or advice that has a one per cent chance of being correct hundred per cent of the time. You can even get advice that has one per cent chance of being correct one per cent of the time, but that’s about it.

It’s a little bit like what Abraham Lincoln once said, “You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.”
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