How To Predict In Stock Market?
Prediction is one of the easiest things to do but very difficult to get it right. Even though investors know that we cannot predict the future exactly, we are always in the business of predictions and extrapolating the numbers. As an investor, while analyzing the company we are looking at the accounted numbers but the problem with numbers is that we are analyzing the numbers of the past but we are investing for the future. The irony is that, even if we get all the past data and information, we cannot exactly predict the future.
Why are investors always interested in prediction?
Future lies in uncertainty. Market participants don’t like any uncertain things to happen. E.g. Demonetisation. Investors think that after reading everything about the company without leaving a single piece of information they can easily predict how much the company is going to grow its profits or revenue in 3-5 years but that is not the case. Predicting the future of the company gives the false sense of satisfaction that everything is under our control. If something other than our prediction happens, we may not able to internalize it. The false sense of satisfaction is even more dangerous than prediction itself.
How to deal with predictions?
We know that past numbers of the company don’t say the exact future of the company but numbers can be used as one of the indicators. For example, imagine that you are watching a marathon race and you see that player_1 is leading the race and is just 20 feet away from the finish line, whereas the player_2 is 60 feet away from the finish line and rest of the players are far behind both of these players. If someone asks you “who will win the race? “, then you would say player_1 has more probability of winning. Here we are not a prediction but rather deciding on the data that we have. This does not mean that player_2 will not win, if player_2 ran very fast and overtook player_1 then, player_2 could win.
The main point to take away is that numbers don’t say everything about the future but they say something about the future. If investors have the attitude that numbers say everything, he would not be anticipating any change. For example, in the above example when the player_2 overtook the player_1. Investors should cultivate the habit that numbers don’t say everything about the future but they say something and when the facts change one should change their minds.
It is very astonishing to know that, we can improve our predictive skills not by collecting more data but rather by having the right mental attitude in handling predicting.
How to cultivate the right attitude to deal with prediction
- The first thing one must inculcate into his mind is that we cannot predict the exact future.
Once we convince ourselves that, we cannot predict the future of the company then the rest of our analysis becomes relatively very easy. You must not fool yourself by saying that we can predict everything.
- We should know to say “I don’t know”
When someone asks investors about certain opinion about the future, where they might have no idea what’s going to happen in the future, they generally intend to say that “there is 50-50 chance of certain things happening”. If someone predicts the future by saying “50-50 chance”, they are typically hedging their decisions. They hedge because they themselves are not sure of the future. They hedge to safeguard themselves against uncertainty.
Many investors think that, if they are not predicting the future of the company, they are missing something or left behind because every other investor is predicting the future.
They just feel uncomfortable, when they say “I don’t know” or “I don’t know where the company is going to look like is future”. They feel uncomfortable because they think that they should be knowing everything about the future of the company and this, in turn, leads them to feel humiliated and left behind when they say “I don’t know” to someone who asks about the future of the company. This is the wrong attitude for investors.
But on the other side, if you look at all great investors and when someone asks any questions mainly regarding the future prospects of anything, most of the time they say “I don’t know”. This is the core difference between great investors and amateur investors.
Learn to say, “I don’t know”. There is no harm in saying “I don’t know” because everyone cannot know everything. This attitude leads you to learn about new things when you surrender by saying “I don’t know” and you can improve your decision-making skills by learning new things.
This is one of the key attitude investors must develop in order to make better predictions.
- Intellectual humility
Investors must have the mindset of acknowledging their mistakes. Most of the investors don’t admit their mistakes. For example, you might have seen many people who call themselves as investors, would regularly come in financial news channels and make forecasting of GDP growth of India, interest rate hike by FED or US-China trade war etc and when one of their forecastings goes wrong, they would not say “ I made wrong predictions” or “I was wrong in my analysis” but rather they defend their decisions. The harsh truth is that many investors don’t want to admit their mistake openly in public because they think that it would damage their image. It takes a great gut to openly admit our mistakes.
If you look at all great investors, they always acknowledge their mistakes in public and they learn from their mistakes and they know that learnings new things would sharpen the prediction skills.
Most of the investors who don’t acknowledge their mistakes, don’t learn any new things and keep on making the same mistakes.
Investors should cultivate the habit of intellectual humility by admitting their mistakes for making better predictions.
How to predict?
If you re-read the above three mental attitudes again you will get to know one common thread that connects all the three and that is “learning”. Learning new things and updating our views based on new learnings must be the key attribute that investors must possess to make better predictions.
Investors should be very clear that just by making good predictions doesn’t guarantee any success but rather increases the chances of being successful. Without the pursuit of life long learning, investors cannot make better predictions for decision making. Investors should never ever forget that learning new things is the secret key for predictions.