At the market peak of 21,000, Vishal Kampani predicted on CNBC that there will be no pullback. The market has crashed by more than 1,700 points after that confident prediction. Why are experts often wrong?

The daily parade of experts on Indian TV channels is more entertaining than enlightening. This is because the experts are often wrong. Most interestingly, exactly like the retail investors, they are often very bullish at the very top of a market rally and extremely pessimistic at the bottom.

The latest example of this is the comment by Vishal Kampani, MD of JM Financial, speaking to CNBC TV18 on 11th November. The channel asked Mr Kampani about his "own call on markets… do you think we still have got headroom out here or do you think we will get capped sometime soon?" To this question, Mr Kampani replied with supreme confidence: "We do have some headroom here. There is 10% upside case very easily possible driven by strong liquidity and global flows."

CNBC asked again, "Are you predicting some kind of a pullback? Is that possible because last time there was a mild pullback in October, which had stopped at 6,000 or just below it?" Mr Kampani was as emphatic and specific about this question too: "I don't expect the mild pullback in the short-term. The flows are very strong - even if you look at the macro-trends across the world, it seemed to be stable. There is obviously a QE2 happening in the US, which increases liquidity by almost $75 billion every month for the next couple of months. So the macro-trends are very strong. The only big risk factor can be China. If China has a significant slowdown - but I wonder what the policymakers can do in China to slow it down."

This conversation was being broadcast when the Sensex was just shy of 21,000. The very next day, the pullback, that seemed impossible, started.

The Sensex was down 432.20 points on the 12th. There was some rally (152.80 points on the 15th) the next working day, but the Sensex fell again on the 16th, an even bigger fall of 444.55.

Buyers simply disappeared. After further bouts of sharp decline, including today, the Sensex is at 19,691.84, a fall of 1400 points (on a closing basis and 1700 points on intraday basis) from the fateful day that Kampani predicted that there will be no pullback. 

All this is no reflection on either the channels or on the experts. After all they mean well. And why blame Indian channels and Indian experts? It is the same all over the world.

The point is, "experts" are habitually poor predictors.

There are two reasons why forecasts are often wrong and those two factors often interact to create a bigger error. One, stocks do not follow fixed patterns, which leads to errors and two, the human mind is too prone to emotions while making predictions, especially about something that is uncertain. A million factors influence the market and these factors are ever-changing, leaving even the most experienced investors out of depth at times.

To this if you add typical human frailties like greed, hope, fear etc.; it is no surprise that many top investors and traders with decades of success and experience behind them have suddenly gone belly-up.

Experts have been wrong ever since they have been trying to predict. David Dreman, in his 1979 book Contrarian Investment Strategy, examined the forecasts of financial experts over 50 years starting in 1929. Dreman found that their forecasts consistently, dramatically underperformed. They beat the market just 23% of the time. Dreman gave many stunning examples. Here is one. At the end of 1971, Institutional Investor magazine polled more than 150 money managers in for their top picks. By end-1974, the experts' top 10 picks were down an average of 67%. In February of 1970 in a New York conference, fund managers were polled for what stock they thought would be the top performer that year. The favourite was National Student Marketing (NSM).

From its February high, the shares of NSM dropped 95% over the next five months! At the same conference, the experts said airlines would be the best performer. The airline sector fell by 50% that year.

People love forecasts. The more specific the figure and the more specific the date of occurrence, the more people are hooked. In the highly uncertain world of markets, certainty is a straw they hang on to desperately. This is why newspapers ask "experts" and TV channels poll brokers (of all people) to predict the Sensex next year.

It may be entertaining - but is useless for investment.

The most laughable is the brokers' research announcing short-term "target prices" on stocks. These short-term targets are rarely met but that does not stop the securities industry from continuing with the charade of dishing out these forecasts quarter after quarter because investors like to lean on these "target prices" as an additional confirmation of their purchase. There is a market saying which captures this well. Experts can predict a date. Or they can predict a move. But they can never predict a move by a given date.