‘It’s tough to make predictions, especially about the future.’ This quote, attributed to baseball professional Yogi Berra, highlights the challenges and, sometimes, foolhardiness of predictions. However, come Samvat and English new year, year after year there are predictions galore. Targets are sometimes hit, missed many a time, yet everyone comes back with renewed vigour to predict again.
Without naming anyone, there have been many targets like Sensex at 28,000 by end of 2008, Sensex at 1,00,000 by 21-22 that have come and gone and were missed badly. Sensational targets that will get tested, going ahead, are those like Sensex at 2,00,000 by 2030. Often, the targets you come across are missed.
So should you ignore them? Not at all. Most predictions – short term and long term, by well-qualified people — provide a perspective worth considering. But here are three checks you must do when considering predictions of market gurus before investing.
Focus on the rationale
The right approach to benefit from these perspectives of market professionals is to check for rationale and themes they are highlighting that will play out.
For example, a famous report published in 2010 by a brokerage house predicted that India will be a $4.5-trillion economy by 2020. Three years past 2020, we are yet to cross $4 trillion. Although the GDP prediction went awry, many of the predicted themes that will drive GDP to the target, as mentioned in the report, have played out reasonably well.
The report focussed on financial services and discretionary consumption as good investment themes, as standards of living improve rapidly in a large growing economy. Many multi baggers have sprung out of these sectors as these themes played out.
Hence, next time you hear a broad target, check and analyse the theme and rationale that form the basis of the predictions. While the targets may get missed, good investing opportunities could lie in the underlying themes.
Filter for biases/blind spots
Cognitive biases are well-entrenched in human beings, and investors and analysts are no exceptions. Bulls who have made a lot of money in stock markets rarely change tack; ditto with bears. So when targets are given by successful investment gurus or sell-side community (where bias is on the bullish side), you may have to filter for these. How can you do that?
In his 1991 letter to shareholders, Warren Buffett (the Oracle of Omaha) refers to a lesson he learnt from the book The Intelligent Investor. ‘Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, ‘Margin of Safety.’ He stresses how 42 years after reading the book, he still thinks those are the ‘right three words’. He further notes how the failure of investors to heed this simple message has caused them staggering losses.
At the start of 2008, while aggressive Sensex targets were given, the subprime issue had already been raging for a while, and a few learned voices were warning of major downturn. But those views were not heeded while targets were given.
So,always apply a margin of safety before investing, which helps to factor for biases and blind spots. This is especially relevant at a time like now when broader market valuations are not cheap, but global economy is dealing with multiple geo-political and macro economic crises. Once in a while, bears get to deliver the knockout punch in the markets although they may have lost many rounds. Margin of safety will ensure you don’t get knocked out.
Wait for opportune moments
Recently, a Sensex target made by veteran investor Mark Mobius made the headlines. He believes Sensex can reach 1,00,000 in the next five years. How good is that and should that entice you to invest in the Sensex now? The target implies 5 year CAGR returns of 9 per cent, and may appear quite reasonable to many in terms of probability. Even if there is some contraction in valuation multiples, but Sensex earnings grow in low double-digits, 9 per cent CAGR can be achieved.
However, this is at a time when risk-free government bonds with 5-year tenure will give you CAGR returns of 7.3 per cent, dimming the relative appeal for equities.
So if the target appears achievable to you, what should you do? Wait for market corrections. If you analyse decades of market history, you will observe corrections play out from time to time. Even in recent years, corrections played out in March/July of 2022 or January/February of 2023 that turned out to be good investing opportunities. The lower you buy, better your CAGR returns (as long as the original target and thesis remains intact).
Starting this Samvat, consider following these rules when you hear big Sensex and Nifty targets. Happy investing!