Wealth Creation V/S Forecasting
This Blog is mostly about making money, but that is not my only focus. I try to understand the world and educate myself about the issues affecting it. I have thought about a quote from Eleanor Roosevelt many, many times. She said, “Great minds discuss ideas, average minds discuss events, small minds discuss people.” In that spirit, I spend much of my time researching and learning about ideas.
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Today I want to discuss about how Investing Legends Create Wealth without Forecasting?
Please Read our Blog “Being Right or Making Money” before reading this Blog.
George Soros (the man who made bank of England Bankrupt), whose modest $1 billion take‐home pay of a few years ago qualifies him as a market guru, says in his book The Alchemy of Finance,“My financial success stands in stark contrast with my ability to forecast events … all my forecasts are extremely tentative and subject to constant revision in the light of market developments.”
While 95 percent of the people on Wall Street are in the business of making predictions, the super successful Peter Lynch, in his book Beating the Street, says, “Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts”. And as Mark Twain once observed, “The art of prophecy is difficult, especially with respect to the future.”
I think it was Alan Shaw, one of the more successful practitioners of technical analysis, who said, “The stock market is man’s invention that has humbled him the most.” Fellow legendary technician Bob Farrell warned, “When all the experts and forecasts agree—something else is going to happen.”( Recent Example of this is the Brexit Vote)
Financial theorist William Bernstein described it similarly, but with an even darker message: “There are two types of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know where markets are headed. Then again, there is a third type of investor—the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”
Before examining indicators, I’d like to discuss the record of some professional forecasters. Perhaps the biggest myth in financial markets is that experts have expertise or that forecasters can forecast. The reality is that flipping a coin would produce a better record. Therefore, relying on consensus economic forecasts to provide guidance for investment strategy is almost certain to fail over the long run. Consider forecasts from the Survey of Professional Forecasters released by the Federal Reserve Bank of Philadelphia. The dashed line shows real GDP. The chart shows seven recessions (shaded zones) since 1970. As a group, professional economic forecasters did not correctly call a single one of these recessions. In fact, they have never predicted a recession. on average economists have been 59 percent too high in their 12‐month forecasts (predicted growth: 3.1 percent; actual growth:1.9 percent).
The last word I’ll offer on predictions is from the Fed’s leader during much of the period covered by the chart. In October 2013 Alan Greenspan said, “We really can’t forecast all that well. We pretend we can, but we can’t.” Forecasting the economy and the investment markets consistently and reliably is very difficult. In fact, consensus predictions often contain the seeds of their own destruction by altering human actions. Most crowds are usually wrong at sentiment extremes.
Conclusion – We at Stallion Asset have delivered 288% returns in last 3 years ending December 2015 investing in Small-Midcap Companies which are often ignored by the Analyst Community. We have never used complex forecasting techniques, never predicted the Sensex or Nifty or Macro economic activity. We are in the Business of Reacting, a Chartist should know even before placing a order that what will he do if prices reach a certain level up or down, will he trail his stop loss, book profits or even book losses. A fundamental Investor should has a more subjective task of knowing if his thesis is working right or no. I Read a lot of Book about the best investment manager and Believe me none of them a good forecaster of the future but they are great risk Managers.
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