Moneycontrol
Last Updated : Dec 28, 2015 04:31 PM IST | Source: Moneycontrol.com

This is how CY2016 will pan out

Many experts attempt to predict future course of action in financial markets. However, seldom one gets most of this predictions right. It makes more sense to position yourself to benefit from various developments in the financial markets than trying to predict the financial markets.

Amit Trivedi

This is again that time of the year when the business and investment world considers doing the following:

1.Looking back at the year gone by
2.Preparing a list of resolutions for the coming year
3.Predicting what lies in store in the coming year

Let us also indulge into the same exercise. Here are my predictions for 2016:
1.The year will end on 31st December
2.In all likelihood, by December, we will still have seven days in a week

Well, if you expect absolutely correct predictions, I cannot do better than this. However, if you want to take certain actions for a better future or to achieve certain objectives, it is important to understand that the future is uncertain. The best of the forecasters cannot be right 100% of time.

As I have written in my book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”, “The only thing I cannot predict is the future.” I believe, forecasting correctly is an extremely difficult and a low-probability task. Still, that seems to be the favourite pastime of many.

People often equate expertise with the ability to see the future. We respect the “visionaries” – those who can visualize (the future). Hence, when people want to know the future, they turn to the experts. However, the experts are also humans and they also suffer from similar biases.

One of the prime examples of inability of forecasting came from a renowned institution, International Monetary Fund (IMF). In the World Economic Outlook published by IMF in October 2007, it said, “In advanced economies, deep recessions have almost disappeared in the post-World War II period …”. The timing could not have been better.

The idea is not to point out the mistake of such a reputed institution or the smart and intelligent people working there. These are brilliant people and we are not trying to belittle them. However, the fallibility of these experts is there for all to see. Does it mean, these people have no expertise? Well, not really. They are experts, but they cannot always forecast future correctly. What the experts can do is to consider more scenarios and prepare themselves for (1) taking the advantage of opportunities, while (2) reducing the potential damage from any adverse event.

Let us also understand that often the forecast is a simple extrapolation of the recent past. This was evident when some refused to believe in 2012 that gold prices can ever come down. Similar tales are prevalent at different points in time with different assets. However, at that time, many forget that asset price movements are cyclical and what goes up comes down and vice versa.

A combination of extrapolation of the past and forgetting the cyclicality result into the forecast turning wrong when the events take a ‘U’ turn.

If something continues to go up, people tend to accept that as the reality and extrapolate the prices to continue the run up. History suggests that this is not true. And the forecast based on extrapolation turns out to be incorrect.

Please remember to take all the forecasts with a pinch of salt. Check the assumptions that the forecasters have made to arrive at these forecast.
In the end, my forecast for 2016 is that many would still continue to make forecasts and many among the forecasters would be wrong. However, I cannot predict correctly, who among them would be right or wrong.

Prepare, don’t predict – would be my advice for the future.


The author runs Karmayog Knowledge Academy. Views expressed here are his personal views. He can be reached at amit@karmayog-knowledge.com.
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First Published on Dec 28, 2015 02:42 pm
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