This column should have been written around two months back, when the first Sensex targets for 2014 started to hit my mailbox. But as they say its better late than never. This is an annual exercise carried out by those closely following the Indian stock market. The one and only rule of this exercise is that the Sensex target being predicted for the next year should be higher than where the Sensex currently is.
Let's take a few examples to understand this in some detail. CLSA analysts feel that by December 2014, the Sensex should hit 23,500 points. Those at Deutsche Bank Markets Research are slightly more optimistic and think the Sensex should hit 24,000 points. Nomura Securities expects the Sensex to touch 24,700 points by the year end. I could go on and on about this, but the basic point is that everybody is positive that the stock markets will do well this year.
But the question is how do these guys know? John Kenneth Galbraith, one of the greatest ecnomists makes a very important point in his book The Economics of Innocent Fraud. As he writes “The fraud begins with a controlling fact, inescapably evident but universally ignored. It is that the future of economic performance of the economy, the passage from good times to recession or depression and back, cannot be foretold. There are more ample predictions but no firm knowledge.”
And why is that the case? “There is the variable effect of exports, imports, capital movements and corporate, public and government reaction thereto. Thus the all-too-evident-fact: The combined result of the unknown cannot be known,” writes Galbraith.
But even with this basic problem, making predictions can be a fairly remunerative career. Also, those who make such predictions play a very important part in telling investors what they want to hear. As Galbraith writes “The men and women so engaged believe and are believed by others to have knowledge of the unknown; research is thought to create such knowledge. Because what is predicted is what others wish to hear and what they wish to profit or have some return from, hope or need covers reality.”
What makes the job of those predicting easier is the fact that with so much information going around something that sounds sensible can always be said, to justify the fact that the stock market will keep going up. As John Allen Paulos writes in A Mathematician Plays the Stock Market “Because so much information is available-business pages, annual reports, earnings expectations, online sites, and commentary-something insightful sounding can always be said.” This is something that Galbraith alludes to; “Predictions from a financial firm, Wall Street economist or financial adviser as to economic prospect for a corporation-recession, scheduled recovery or a continuing economic boom-are thought to reflect economic and financial expertise. And there is no easy denial of an expert's foresight. Past accidental success and an ample display of charts, equations and self-confidence depth of perception. Thus the fraud. Correction awaits.”
And so the story continues. In fact, what nobody checks for is what was the prediction made last year and how close things finally turned out to be? If that were to be the case, maybe the number of such predictions would come down. Till that happens, such forecast will keep landing up in our mailboxes.
Vivek Kaul is the author of 'Easy Money'. He tweets @kaul_vivek.
This article was originally published on May 16, 2014.
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