MYTH

Market forecast is a favourite pastime at this time of the year. Brokerages and big investors quote index figures that they feel will be scaled by end of the next year. Traders and brokers run high on optimism, because their tribe is such that without optimism they are irrelevant. So, when Rakesh Jhunjhunwala recently said that he would be disappointed if the Nifty doesn’t hit 1,25,000 by 2030, he was talking for himself. At the same time he mentioned a figure that will reside strongly in everyone’s psyche. Predictions get set in a lay investor’s mind and they take these as cues to increase their investments to benefit from them as the markets go up. The myth is further corroborated if you do simple math and see how much the Nifty needs to post each year for the next 15 years. Nifty at about 8,500 means in the next 15 years it has to grow 15 times or so, which is not much if one goes by historical returns and more data that can sway the number to be presumed realistic. One of the reasons why one looks forward to predictions is that very few of such predictions ever get challenged. Some brokerages are known to work on estimated earnings that their research teams predict, which are then turned into numbers that become attractive enough to be quoted and mentioned as forecast.

REALITY

Not all prophecies come true, yet one lives with the hope of them getting fulfilled. Take, for instance, a statement made by the same Mr. Jhunjhunwala sometime in 2007 that the Sensex would scale 50,000 over the next 6-7 years. Today, we are just over the half way mark of that prediction. It is a fact that the long-term average returns on investments in the Sensex hover around 15-16 per cent, which acts as the base for most market predictions. What is equally true is that the stock markets have several unpredictable factors that govern them. Economies change, governments change, interest rates change and almost everything to do with investments changes including investor needs. In A Mathematician Plays the Stock Market, John Allen Paulos says, “Because so much information is available, something insightful sounding can always be said. It is in the interest of those who are predicting a figure for the market index to reach a figure that they predict. There is a reason attributed to every move from the fall of the rupee, to economic scenario in Tonga to even an election in Tahiti that could be construed to impact Indian stock markets, irrespective of no correlation of such events in the past. A must-read to deal with such predictions is The Black Swan:The Impact of the Highly improbable by Nassim Nicholas Taleb. As investors it is good to be optimistic, but take market predictions with a pinch of salt as none of what was predicted 12 months ago has fully come true.

OLMdesk@outlookindia.com