This makes me come to the first point. Most specialists, including those who have spent a lifetime studying a particular field, cannot consistently predict future events. In the popular book, Superforecasting by Philip Tetlock, the author talks about how distinguished defence and intelligence experts consistently got their near-term forecasts completely wrong about subjects they have specialised in and spent their careers in.
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Investors nearly always get it wrong
This is also true for investors. No one, and I repeat, no one knows what tomorrow will bring. Not journalists, not fund managers, not finfluencers. Everyone projects their assumptions onto others. Another very prevalent thing is trend extension. People just extend whatever trend is commonplace at the time to the future. If markets are doing well, they consider it will continue to do well and vice-versa. There is very little contrarian thinking in forecasting. Then there are a few, sometimes very media-prominent personalities, who are always bearish. I can give many examples here, but I have a policy that I have learnt from Buffett, of not criticising people in public. But if you keep your eyes and ears open, over a few years you will realise who these people are and then learn to steer clear of their opinions.
Way to look into the future
However, to be an investor forecasting is essential. You cannot say that I will not do it. As a fundamental analyst, when you are buying a stock, you are forecasting, implicitly or explicitly, that in the future it will do well and consequently its price will rise.
As a technical analyst, when you are analysing a chart you are forecasting a certain pattern or indicator to play out in the way you expect or hope it to. All available information is of the past and all returns are made in the future. The bridge to connect the past to the future is through your forecasts. So, the way to think about this is to keep updating your forecasts based on new incoming information.
This requires a few things:
- actively looking for additional information
- an open mind to accept new information even if it is contrary to your expectations
- having a framework in place to deal with new information
- taking action
My prognosis about the economy and sectors
It is difficult to conclude anything from a single quarter’s data. The slowdown came mostly in manufacturing and mining, both of which could have been due to heavy monsoons and central elections. The model code of conduct came into effect from Mar 16th and that meant a near stoppage of all infra and central government related spending, which has been the cornerstone of capex in India in recent quarters.
This GDP data will set the cat among the pigeons with now more clamour from the government and media for rate cuts from the RBI. It will be interesting to see what the RBI does as inflation continues to be persistently high and refuses to bow its head.
My sense is that we will start seeing the government trying to push capex massively in the next couple of months, i) to make up for the slow capex spending in H1 and ii) to bring back growth on track.
Sectors I like
All this should be very good for infra and capital goods-related plays like railways, roads, airports, logistics, defence etc. With the recent correction, some of the frontline companies in these sectors have seen a fair bit of correction and although not cheap, can provide good risk-reward for patient investors.
The other sectors which look interesting at this time are: chemicals (need to be very selective), IT and healthcare (entire value-chain from pharma to hospitals to diagnostics).
Overall, I am not as short-term circumspect as I was a month before. I continue to believe that the Indian market is the place to be for this decade and the next and enormous wealth can be created.
Your ultimate success will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.
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