Tuesday, June 18, 2024
Home > Finance News > Investing and Forecasting by Anand Vardarjan, Business Head, Tata MF

Investing and Forecasting by Anand Vardarjan, Business Head, Tata MF



In 1906 famous statistician Francis Galton attended a fair in Plymouth where participants had to guess the weight of an ox and the one who guessed it right, won a prize. Galton looked at each of the entries and deduced the average weight guessed by all participants came in at 1198 lbs whereas the actual weight of the ox was 1197 lbs and that the crowd was often right. In his book Wisdom of crowd, James Surowiecki mentions this incident, which was later entertainingly op ed by John Kay where he went a few steps further to say, that over the period the weighing scales gave way and since the crowd was guessing the weight of the ox so accurately, there was no need to actually weigh. Over the years, the guessing game only intensified with wagers talking to the farmer informally, looking at what the ox was being fed, the health of the ox and so on. There were 2 organisations identified to set health standards for the ox. The rules got tighter and the farmer was required to publish the data only 4 times a year and informal passing of information was denied. The scales were never repaired and eventually it was believed that the weight of the ox was the average of all guesses. Fundamentals had completely disconnected from reality.

Ditto in investing. A company publishes results only 4 times a year while there are many forecasts on their earnings. Eventually when earnings are reported it is said that earnings missed estimates. It should have been said that estimates missed earnings. Do we ever say monsoon missed forecast? Wet streets don’t cause rain and the cause-effect relationship needs to be understood. That calls for another post, but the key to remember is that forecasting a company’s earnings is difficult. It is even more difficult to predict price movements, since that is based on the expectation of various market participants. While results are reported only 4 times a year, there could be a zillion views about the company’s prospects and the price keeps changing in anticipation. Price changes every second, but value of the company changes very slowly. Not surprisingly markets are called voting machines in the short run and weighing machines in the long run.

Imagine you are asked to predict the score of a cricket match where the players comprise of professionals of international repute, school boys and even some bankers who just wanted to swing their bats. There are no rules or formats and some play this in T20 format i.e. playing unorthodox cricket in a hit out, or get out manner, some play may be playing limited overs striking a balance of scoring quick runs and preserving wickets. There is also this set of test cricketers with no hurry to score and are happy to play orthodox cricketing shots without worrying about run rate. The equity market set up is almost identical with different types of participants. For a few, the definition of short term could be 9:30 am and long term could be 3:30 pm the same day, while for some short term could be a couple of years and long term could be even longer. Price movement is a function of the interaction of all these types of ‘investors’, technical, fundamental analysts, global markets and some “breaking news” to top this all. To believe that anyone can accurately call the aggregate outcome of these interactions of such a heterogenous crowd & events is remote.

When we don’t know what is happening, “I don’t know” is always a better answer than “I think so”. “I don’t know” sounds stupid, but “I think so” looks smart. Our role as money managers or advisors is not to predict the road for the client, but to prepare the client for the road. Basics like asset allocation, matching investment with time horizon, risk appetite are important rather than trying to time markets. Advisory, not astrology, is our role.

Are key events like election or Covid, irrelevant and to be ignored? Investing is always about being probabilistic rather than deterministic. It is like a game of chess, where one move can open various possibilities and outcomes and one must look at tradeoffs before making the next move. Two things that are important are survival and patience. The key is to not risk anything which threatens survival.

Markets have to navigate through a lot of uncertainty and the only 2 people who know when and how this will end, are God and a liar. Here is quote from Den Voltaire that sums it up well, “Uncertainty is not a comfortable place, but certainty is absurd”. Let this serve as a reminder when we hear any ‘expert’ quoting where markets are headed next.

The views are personal.

Disclaimer: Content Produced by Tata Mutual Fund


Source link

Leave a Reply

Your email address will not be published. Required fields are marked *