The Folly of Forecasting!

Patchy record : Predictions made in the beginning of 2015 have woefully gone wrong

As the year draws to the close, one thing that is not in short supply now is the rising number of predictions for 2016. Be it market levels, stock picks, hot sectors, there is no dearth of flashy forecasts. From mainstream media to business dailies, predictions for the new year are the buzzing topics. This column is not about dissecting those forecasts for its veracity, but to study how previous year’s predictions have panned out in reality and provide insights into how much one can trust these forecasts.

Let us start with predictions for market levels that were made last year. Below chart brilliantly captures the madness. If the race here is for how far one is off the mark, top global banks were the ones leading from the front. Ivy banks outbid each other gleefully with their gloated forecasts for the coveted prize. Nomura nudged the rest to gain the top slot with its outrageous forecast of near 34K for Sensex by 2015 year end. Though trailing, other banks were not far behind in their foresights. Their forecasts were equally macho with the median running at 33K+. They did downgrade their forecasts as the year unfolded, but could not match up with where Sensex has finally ended up. At 26K level now, Sensex has left the seasoned banks high and dry with their frivolous forecasts. Smart money is not that smart, after all.

Prediction1

Now, moving on to forecasts on stock picks, the story is equally stunning. Credit Suisse in its July 2014 report came out with top 10 investment ideas for India, citing India’s macro sweet spot on structural rerating potential. Performance of these ten stocks has been captured graphically ( in two charts) since that stellar recommendation. No hiding place for Credit Suisse. Much of them  have been teetering on tiny gains (except Asian paints) while one (Oil India) has woefully lost serious money for investors.

Credit Suisse Top 10 Investment Ideas (July 2014)

Prediction3

Prediction4

Forecasting is fabulous for making flashy headlines and news stories, but much less use for any serious investment decisions. Macro forecasting is fraught with risks not for any weird incomprehensible reasons, but because it is a function of  inter-dependant play of ever moving complex parts.  As Buffett says, “Prophecy reveals far more of the frailties of the prophet than it reveals of the future”. If past year is any guide to go by, investors are better off to ignore the hot buzz around what is in store for 2016. Sticking to basics, staying on the ground with unrelenting focus on stock picking would deliver far handsome results than any crystal ball gazing , however much stimulating intellectually though. Watch out for another stellar year for stock picking!

Wish you a great and prosperous Happy New Year.

Happy Value Investing!

 

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