Can you really predict the markets?

It is a common belief that we can forecast the upcoming big economic events and invest or divest accordingly just by looking at past events and being prepared for them. But hasn’t history always taught us that the future is unpredictable? History helps us calibrate our expectations, study where people tend to go wrong, and offers a rough guide of what tends to work. But it does not help predict the future. In his book “The Psychology of Money” Morgan Housel coined the term “historians as prophets” fallacy, for investors falling into such a trap. Think for yourself, if history is the perfect guide to the future shouldn't historians should have already known about the upcoming events such as the coronavirus outbreak? We could have been prepared for the same.

In the world of finance, people tend to sit for hours in front of candlestick charts of different stocks just to analyse what has been done by investors in the past might work the same way and they could book some profit out of it. Although technical analysis strategies work a lot of the time, it’s more about the indicators. Author Harneet Singh says that it is 20% strategy and 80% psychology in trading. Not only in the short term, but the same rule also applies in the long run too. The Great Depression of 1929, World War II, the 1992 Crash, the dot-com bubble, 9/11, the housing crash of the mid-2000s and the coronavirus outbreak. None of these big events that had a huge impact on the markets was predicted by the investors.

History doesn’t also consider structural and technological changes happening in the world. The world keeps changing every day, Dollar is getting less recognised, globalisation is itself becoming history and there was never such a time in the books. Investors such as Micheal Burry (Who actually predicted the Dot-com and Housing market crash) fail to be right all the time. Still, most people say that they know how the markets going to work in the next 10 years. Ironical, right? So, what are the lessons we should learn from these bitter words? That we shouldn’t have to be right all the time and second, Stanford professor Scott Sagan once said something everyone who follows the economy or investment markets should hang on their wall: “Things that have never happened before happen all the time.”

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