Expert prediction of no Sensex decline in tatters

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.

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    COMMENTS

    kumar

    9 years ago

    MARKET EXPERTS SAY, LIKE WEATHERMEN : IF IT IS CLOUDY, IT MAY RAIN, IF IT IS NOT CLUDY, IT MAY NOT RAIN!

    IF INDEX GOES ABOVE THIS, IT WILL GO UP! IF IT GOES BELOW THIS, IT WILL GO DOWN! BUT WHAT THE HELL WILL HAPPEN, NO 'MAI KA LAL' HAS THE GUTS TO SAY!

    ALL OF THEM, IN COLLUSION WITH GREEDY TV CHANNELS, CONFUSE THE SMALL INVESTORS MORE THAN HELP THEM!

    LIKE EXIT POLLS CANT BE PUBLISHED UNTIL ELECTIONS ARE OVER, MARKET PREDICTION SHOULD BE BANNED UNLESS THE PREDICTORS TAKE AN UNDERTAKING OF AT LEAST 50% RIGHTEOUSNESS!

    REPLY

    Madhur Kotharay

    In Reply to kumar 9 years ago

    You seem to imply that poor little small investors like you and I are not greedy. I think the big guys who are greedy, at least know the field. They have paid their price in learning about the industry, honed their skills. The poor little small investors do not want to do any homework, spend any time and want to profit from this. I think these freeloaders deserve to lose money. It is said that if someone offers you a free lunch, it was cooked 3 days ago.

    Pradeep

    In Reply to Madhur Kotharay 9 years ago

    Agreed, in market, its a zero sum game, every man for himself.

    As Dr Elder says, every profession requires some kind of license, Doctors needs to pass lot of exams, pilots needs to pass lot flying time etc. Only in trading , newbies come and think they can make money without putting efforts to learn and blame others when they loose money.

    I think its time they shut up, read financial history, see how other bull markets ended badly and how bad bear markets turned around.


    Timing is everything, they need to learn not to invest when previous past couple of years returns are very high.

    The same people might have invested in Bond market in march 2009, instead of investing in equities.

    Stop complaing, start reading and learning! Follow erudite , educated and experienced voices like Debashis, Grantham and others.

    Debashis Basu

    In Reply to Pradeep 9 years ago

    I am embarrassed that you should mention my name with Grantham.
    On another note, GMO was one of the four which has funded Money Matters!

    Pradeep Nalluri

    In Reply to Debashis Basu 9 years ago

    Pardon the embarrasment, but i like your fortnightly erudite column on markets. I llok forward to your fortnightly call as the same way i look forward to quartely news letter of Grantham and others.

    Pradeep Nalluri

    In Reply to Debashis Basu 9 years ago

    What Money Matters are you referring to in the above comment? Pardon my ignorance!

    Debashis Basu

    In Reply to Pradeep Nalluri 9 years ago

    Home page article (2nd Lead). We broke the story at 9 am

    Manisha

    9 years ago

    The absolute truth is that no one can consistently predict markets accurately. It is a futile exercise as markets generally take their own course depending on a combination of numerous fundamental factors and liquidity which practically is impossible to determine. Hence genuine long term investors who invest and forget are the only people who earn and traders always end up as losers. Money always stinks and manipulations, greed and fear will always be a prime component of any trading activity. It is therefore an irony that a person who regularly tracks markets and is in there loses the most. It is better if we only keep track of the companies that we invest in and refrain from predictions which is practically impossible as markets are an indicator of the FUTURE and not the PRESENT and the future has always been and will always remain uncertain.

    Kaustav Majumdar

    9 years ago

    The simple question to ask the experts is that,if they have acquired such superb skills to predict markets,which obviously would have taken them years,why is it that they are so freely sharing their intellectual capital rather than using the same skill to make money for themselves.The TV channel parade is a more "Personal Brand Building" exercise for most experts rather than anything else.

    REPLY

    Madhur Kotharay

    In Reply to Kaustav Majumdar 9 years ago

    I think we people are equally at fault who want to know such predictions. Just as astrologers survive because some people are willing to pay them and heed their opinions...

    One well-known CNBC technical analyst told people on our IIT Alumni Investor Group that they should not listen to his advice given on TV :-(( Apparently, he says, that he gets great investment ideas once a few months. However, since CNBC wants him to come up with something every day, he gives his tidbits daily, which by his own admission are garbage!!

    Think logically! CNBC is in the business of getting revenues from ads shown. So they have to make things interesting for the viewers. Most viewers want: Su Khabar? Market Kewu lage? So let us not intellectualise this whole thing. Take TV channels and expert opinions for info but make your own judgement, which is the hardest thing for most people.

    And as in any field, only a handful make big money while a whole lot lose. Is it not true in any other business, such as garment retail, jewellers, computers, shoe retail, and even real estate?

    SUBHASH MEHTA

    9 years ago

    Before the entry of FIIs in India, market was going as per fundamentals and technicals. At present no such thing exists. Their only aim is to axe the small investors in India. First an atmosphere has been created with the help of Business Channels and so called experts. When small investors put their hard earned money into market, they bring the market down by selling their holdings and then bought the same at lower rates, when small investor sells under panic. This system had been started with issue of Reliance Power, when they first procured shares through IPO, then started selling in this particular share as well as in all other shares, created panic among investing community. The so called experts and TV Channels helped in achieving their goals. Afterwards they procured shares at much low prices. Then we had seen the bullish run. Several unknown smallcaps and midcaps had suddenly spurted, then came the turn of largecaps. Small investors were helpless as their holdings were snatched under panic. Then experts started advising small investors to buy these stocks at higher rates. When small investors bought, the operators sold, thus again causing loss to them. The story is going on with a target of snatching money of small investors. Now there is no story of Fundaments and Technicals. The operators see the positions of traders and holding of particulars share with them and make strategy to loot the small investors of India. They had billions $s, while small investors of India are helpless, thanks to the policies of our Govt. and regulators.....

    Ashok Alkari

    9 years ago

    Dear Mr. Debashis
    My congratulations to you for writing this article on experts and their advice. This practice is doing more harm to the common investor than any gains. The news channels as well as the experts are the people making money while the investors remain cursing as why he listened to the advice. But, then how many experts are there to give good advice based on probability than prediction.
    I am here in the Indian stock markets from last 10 years, mostly wasted my funds by sitting behind the brokers chair, taking advice. I learnt hard way that our experts are the outcome of same age old methodology (half hearted knowledge). On the contrary there should be a precise method and discipline that brings the real & dynamic situation to your knowledge like a new sun rising everyday in the morning.
    If so many people (they say 80-90%) are losing the money or do not see appreciation as per the prediction then somebody is there who is making money. May be this person is more knowledgeable.
    That is where after doing so much research & study in the method of doing market analysis I came to know about the Elliott Wave Analysis. Many people do reject this theory saying it is too subjective. I do not agree with them, probably they have given up, as their brains are not efficient to understand how this method works.
    You have said in this article that stock patterns do not follow fixed patterns. Ya, you are right and I agree with you if you are not an EW analyst. As far as my study of last 8 years bound to believe me that every stock move in a well defined pattern but within the fixed and defined laws. If the law is broken the pattern changes and hence new pattern emerging gives new insight to you on the stock/index movement.
    I will give you an analogy: You will probably agree with me that everything connected to human existence is related to defined phenomenon. Our sun rises and sets at exact time. The crops and different types of crops germinate and matured at defined seasons and times only. We eat; sleep and wakeup at predefined times only. Flowers and fruits grow in particular season and time only. A budding flower has same form in its petals. Our earth tilts at predefined time and angle only. So everything is defined against the time and this process is repeated so far since we born. So, why not the stock prices? This is where the EW analysis guides us to understand this movement in stock prices with the unfolding of time. These developments are taking place under certain laws, which are also defined in wave analysis.
    For an expert in this field it might have taken many years of sleepless night for him to understand the complex waves which compels him/her to remain behind the curtain. Telling investor anything about the probable stock movement based on the wave analysis may be out of investors’ capacity to understand.
    So such experts where ever they are working or doing business are the real people minting money.
    In your article you have written that “human minds are too prone to emotions”. Ya, certainly it is a fact. Wave analysis looks in to this uncertain behavior and then one can make up his mind about this crowd behavior. Is the stock moving up with a force or coming down or its movement is uncertain. These moves are clearly visible on the charts and hence predictions are possible with 90-95% accuracy. Not only that, probable moves in either direction can be counted by Fibonacci retracement levels.
    Thanks for reading my views on your good article; I shall be glad to read more in future from you.

    REPLY

    Pradeep

    In Reply to Ashok Alkari 9 years ago

    Show me two EW analysts, i will show you two different patterns and counts..

    No two EW analysts agree with each other. It has become a bloody joke. End of the day, if you can make money with your pattern, just make money and stop evangelizing it.

    When far too many people follow same investment principle and herd, it simply doesnt work.

    Madhur Kotharay

    In Reply to Ashok Alkari 9 years ago

    While I have no comments on Elliot Wave Theory (and quite likely, there is a strong workable science behind it), I have not heard of any billionaire investor who became a billionaire following Elliot Wave Theory. I have heard of fundamental analysts like Buffett and semi-technical analysts like Soros becoming billionaires though.

    EW's proof, outside of theory textbooks in the real life, is needed. Maybe, Adhikari saab, you should become the multi-millionaire to become the living proof.

    Karan Rajpal

    9 years ago

    Ad below your story-

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    End of story. The entire market is run like that. Stocks like RNRL etc. would not be close to half their current prices, if it wasn't for promoter rigging and the involvement of such experts.

    The funniest are the technical analysts. They waste their and our time by looking at charts and stating if they'll go up or down.
    A strong parallel exists with Astrologers, who can't take care of their own luck.

    REPLY

    Deepak K Rao

    In Reply to Karan Rajpal 9 years ago

    Dear Mr. Karan,
    Well said...I totally agree with you!
    I think, you must visit our website 'www.artha.net.in' and watch a video in the homepage without fail to know about us.
    Thanks and Regards.
    Deepak

    Devsaday Dutt

    9 years ago

    Very well written article

    SUNIL HEMNANI

    9 years ago

    Dear Debashish, It seems funny that we go over this same process of asking astro experts for their predictions for the new year. And nobody has a problem with the results going horribly wrong .However we seem fixed on watching somthing in this Universe of finance going right ,predictably .And horribly so we still listen to these guys whom if you by chance ask if they dont invest in their own ideas unless of course they are frontrunning an idea so .As the statutary warning goes investing in the mkt is subject to risk.So listening to any kind of advice is subject to the same RISK which goes with the market . So the PUNDITS are always right when you dont listen to them and when you do take serious advice from the self proclaimed EXPERT ,dont forget to add salt when taking in the same .

    Madhur Kotharay

    9 years ago

    I have a simpler explanation. Experts have an compulsive reason not to go wrong in their predictions, as they have a reputation to protect. However, given that people have short memories, experts need to show accuracy in their predictions over short-term, i.e. quickly.

    This is easier done with technical and momentum-based calls. So most experts give predictions for tomorrow based on what happened today, or yesterday. That is why you will notice that in bear markets, experts predict more bearish things and vice versa.

    Col Jai Gopal

    9 years ago

    It is ironic that at the end of such an informative article, the Ad by Google is on "Stock Tips from Brokers" claiming above 80% success ratio. I hope investors reading these articles depend more on their own judgement.

    Investor

    9 years ago

    What about the "I know it all" news anchors (Anchor-Investors)?

    ramchandran

    9 years ago

    Maybe SEBI should also have a guildeline to prevent such predictions

    China: Why tightening will not work

    Alternately conservative and liberal policies and regulations by the Chinese authorities have resulted in the real estate bubble getting bigger and increasing inflation

    Back in June I wrote a column about the Chinese real estate bubble. Recently we know that the Chinese authorities have been tightening, but often we do not know how much and in what ways. Apparently, neither do the Chinese authorities. On November 15, the state media newspaper the China Daily announced that China's four biggest state banks had used up their full-year credit quotas for property developers and would stop extending new loans to them for the rest of the year.

    The paper cited a source from the ministry of housing and urban-rural development and quoted several unnamed executives from the banks. For example, one anonymous credit department executive at the Industrial and Commercial Bank of China (ICBC) was quoted as saying, "It is impossible to extend fresh loans to developers."

    What is interesting is that the same newspaper printed a story 10 hours later denying the report. China Daily wrote: "China's top four banks rejected reports that they would stop lending to real estate developers for the remainder of the year." So we have a state newspaper quoting a ministry that was quoting an executive from a state-owned bank, which statement was later denied by the same state newspaper quoting information from the same state-owned banks. Is this sloppy journalism or an intentional 'mistake'? My bet is the latter.

    The incident says volumes about the real estate boom in China, inflation in China, the government's attempts to control the economy and problems associated with distortions of information.

    What is clear is that the Chinese are worried about the rise of inflation. The People's Bank of China (PBoC) said that the reason it raised interest rates was to manage "inflation expectations and consolidating the results of real-estate adjustment policies." And it went on to blame a part of the problem on "loose monetary policies in major economies", meaning the United States.

    One of the problems with the Chinese economy is that it is still very much dominated by central authorities in Beijing. These authorities have ironically put their faith in the one thing that the government often disregards: the law. The Chinese government likes to try to control its economy, and specifically the real estate market, with regulations. They should know better.

    They have been through this before. Starting in late 2007, the Chinese started to put on the brakes for their property markets. Rather than just raise interest rates, they used regulatory methods, including things like credit ceilings, higher down payments, restrictions on third homes and increasing bank's reserve requirements.
     
    The problem with these restrictions is that they don't really work. During the last bubble, banks were supposed to demand a 40% down payment from families seeking second mortgages, but many turned a blind eye if the loan applicant did not hold another property, even if other family members did. They were also supposed to give loans only if the borrower had a certain size apartment, but they never checked.

    When the first regulations don't work, the government pushes the brakes a little harder. They use stronger and stronger restrictions and eventually overshoot. By May 2008 prices had fallen by 30%. And the sales volume in Shanghai was 50% lower than a year earlier.

    The Chinese reacted to the crash like all other governments have. They started stimulating their economy with a vengeance. In 2009, the government ordered the state-owned banks to start lending, and lend they did. They lent a record 9.6 trillion yuan ($1.4 trillion) in 2009. If the US stimulus had been on a similar size relative to GDP, it would have been $6 trillion.

    This year they reigned in the loans a bit, but not much. Their loan target is 7.5 trillion yuan, but that has almost certainly been exceeded. In September alone, China's total lending-including loans from smaller commercial banks-reached 500 billion yuan, far exceeding a previous estimate of 280 billion yuan. In contrast, in 2008 only 4 trillion yuan ($585 billion) was extended in new loans.

    It is not surprising that this wall of money created a real estate bubble. The only real question is why it didn't create more inflation. The answer is that it probably has. The reported inflation is 4.4%, but it could be much more. Food prices are up an annualized 10%, 18 staple vegetables are up 62.4%, ginger is up 89.5% and garlic is up 95.8%. Price controls are being considered.

    So, now the cycle is repeating itself. This year the government started tightening in February. Like price controls on food, none of these regulations will work. To try to rein this deluge will no doubt take stronger and stronger measures. The Chinese government is desperately trying to avoid what occurred in 2008, which is why the disparity of information is hardly surprising. But since it is using the same tools, undoubtedly it will have the same result. Unfortunately this time, the effects will reach far beyond China. 
     

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    MOIL’s South African foray could prove costly

    Company plans to acquire manganese reserves in South Africa, but poor infrastructure could increase costs significantly, says an official

    Manganese Ore India Limited's (MOIL ) plans to acquire vast reserves of manganese in South Africa could prove costly for the company as the country lacks infrastructure and logistic facilities, a senior MOIL official told Moneylife.

    "We are in initial stage of talks. Out of 5,000 million tonnes of manganese reserves in the world, South Africa owns 4,000 million tonnes. However, there are problems of logistics, power and infrastructure and the country meets only 20% of the world's requirements even though it has 80% of the reserves. The proposed investments in that country could be costly for us," said the MOIL official.

    The company is also eyeing manganese reserves in Turkey and Congo. However, the official refused to comment on the progress of the both countries' reserves.

    "The company may also form a joint venture for the acquisitions overseas reserves," added the official.

    MOIL Limited, which accounts for about 50% of the manganese production in the country, will launch its initial public offering (IPO) comprising 33,600,000 shares on 26th November. Media reports say that the company is likely to raise Rs1,500 crore through the IPO. The issue will close for institutional bidders on 30th November and on 1st December for retail investors. 

    The government has not disclosed the price band per share, which is likely to be announced on 22nd or 23rd November, said K J Singh, chairman and managing director, MOIL Limited.

    "The government will divest 10% stake in MOIL, while the Madhya Pradesh and Maharashtra governments will sell 5% each. Maharashtra and Madhya Pradesh own 9.62% and 8.81%, respectively," Mr Singh added. 

    The company is setting up two ferro-alloy projects in separate joint ventures with Steel Authority of India Limited (SAIL) and Rashtriya Ispat Nigam Limited (RINL) to increase the share of value-added products in the company's basket, said Mr Singh. The 50:50 joint ventures will be operational by July 2012, he added.

    The joint venture with SAIL will be located at Bhillai and have capacity of 1.06 lakh tonnes with an investment of Rs400 crore,  while the RINL joint venture will take about Rs200 crore investment and have capacity of 57,000 tonnes.

    The company intends to increase production capacity from 1.1 million tonnes to 1.5 million tonnes as demand from steel sector, the largest consumer of manganese, is growing rapidly, said the company. 

    IDBI Capital, Edelweiss Capital and JP Morgan are the managers of the issue.

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