In any market at any time, nobody knows what is going to happen the next second, the next minute, the next hour, leave alone the next three months or a year.
Many years ago, when I lived in New York, I remember I was in an elevator mid-town when a couple of guys rushed in stomping snow from their boots. One of them turned to the other and said, “Weather forecasting is the business to get into, you get paid even if you’re wrong”.
Everyone laughed, but the exchange stayed in my mind. I returned to India in 1985, about three or four years later, and got involved with my family FX business, which was related to brokerage and market information. Something twigged in my mind and I realised that adding in research could turn the information business into a good business opportunity; adding in forecasting would make it fun.
And, indeed it was. The market was really not much of a market so it was relatively easy to be mostly correct in my forecasts, and with my bright shirts, I quickly built a following not just amongst corporates but also the media, RBI and the government.
I was very pleased with myself. Then, in October 1987, Wall Street crashed, and all my smarts evaporated. The phones were ringing off the hook—everyone wanted me to tell them what was going to happen. I had absolutely no idea and I told people that. But they were insistent, some very aggressively. “How could you not know? You’re the expert”. Expert, hah!
I used to smoke in those days, so, to take a break and collect my thoughts, I went downstairs for a cigarette. I bought a single from the cigarettewala, and as I was smoking, trying to figure it all out, the neighbourhood chanawala, a fat and usually cheerful man, came up to me and said (with a patently fake pained expression), “Sahib, pachas rupya chahiye”.
I shooed him away and went back to my thoughts. But, they, of course, remained as cloudy as my smoke. I looked over at his plaintive face and called him over. “Pachas rupya chahiye”?
“Ha, sahib”, he said, hopefully.
“Thik hai, to bolo dollar upar jane wallah hai ke neeche”.
He was shocked, “Sahib, mujhe kya pata”?
He thought for about fifteen seconds and told me something (I don’t remember now what it was). I went back upstairs; people were still calling so I simply told them what the chanawala had said—I didn’t credit him at the time as it wouldn’t have worked. But I have told that story umpteen times since.
The lesson I learned that day was that, when markets go crazy and volatility shoots up, nobody knows what is going to happen and the chanawala’s view is as good as anyone else’s
That was forty years ago, and since then, I have relearned that truth over and over again and, importantly, the fact that it is true irrespective of whether the market has gone crazy or not. In any market at any time, nobody knows what is going to happen the next second, the next minute, the next hour, leave alone the next three months or a year. That is the Latin meaning of the word “market”—no, I’m making that up, but it is the truth. Which is not to say you can’t make money in markets. Of course, you can, but only if you sit very close in and trade with an ironclad stop loss and money management discipline.
But, forecasts? They never work. Or, let me take that back. They do work occasionally, but over time, you’re better off flipping a coin. Yet, all manners of entities, from banks to investment banks to market advisors to sundry experts persist in putting out forecasts, encouraged by financial newspapers that have real estate to fill. Unsurprisingly, not one of them keeps track of all their forecasts over, say, even a year and publishes the success of the forecasts—I have little doubt that the average success rate would be substantially below 50%.
But, another useful thing I have learned is that unless someone has been specifically burned by a forecast, nobody remembers for more than a few days or a few weeks at most—in fact, in this hyper-media age, recall is probably a lot shorter. Unless, of course, you make an outrageous forecast and it works, or even almost works.
Back in 2003, I had been speaking with a very, very smart client in the polyester business (Delhi-based, by the way). The rupee was around 47 and creeping inexorably towards 50 to the dollar, and he told me with great certainty and quite strong reasoning that the rupee would never—NEVER—cross 50. I was suitably impressed and a few weeks later I put out the report, “38 to the dollar in 5 years”?
I didn’t know, of course, and I wasn’t just trying to be sensational. But, I had extrapolated his reasoning and thought that people should—for the first time ever—at least consider the possibility that the rupee could strengthen sometimes, just as well as when it weakens. Well, as we all know, in 2007, the rupee surged and surged and broke through 40 and almost breached 39 to the dollar. I called up media companies to rent the billboard at Chowpatty but, in the event, no cigar. But, at least, a nice story.
In any event, here is my forecast for July 2019—rain, rain and more rain.
The author is CEO of Mecklai Financial