Blame yourself every time a market expert fails you

Interesting article by Vivek Kaul/ DNA MONEY that I came across on Sify. Re-posting as it is.

The Sensex has fallen by 10.8 per cent since the beginning of this year. Experts who till two months back saw no wrong with the up and away Sensex, and were predicting it will continue to go up, can now be seen on news channels saying "I told you so" on the fall.

Fact is, most of them really don't know what they are talking about.

As Fred Schwed Jr writes in Where Are the Customers' Yachts? or A Good Hard Look at Wall Street, "Deep thinking continues to be, as ever, mostly second guessing."

The book was first published in 1940, and remains relevant even today.

Schwed writes, "But is it surprising that no one of them is ever quite right? The best explanation is that some of them don't know what they are talking about; and those who do know, don't tell all they know, or don't permit themselves to believe all they know."

So, why try and predict something that is largely unpredictable?

Well, there are several reasons. For one, "It seems that the immature mind has a regrettable tendency to believe as actually true that which it only hopes to be true. In this case, the notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter's consciousness. But, we expect a child to grow up in time... This, however, is asking too much of the romantic Wall Streeter - and they are all romantics, whether villains or philanthropists. Else, they would have never chosen this business, which is a business of dreams. But the ultimate dream they almost never shed: that there is a secret, meaningful and predictable, in the rise and fall of financial enterprises - that a "close study" of this and that will prove something; that it will tell the initiate when there will be a rally and give the speculator a better than even chance of making a killing," writes Schwed.

Also, most investors like to know where the stock market is headed to. And this is where the so called "stock market" experts come in, to fulfil an inherent need.

Schwed writes, "For one thing, customers have an unfortunate habit of asking about the financial future. Now, if you do someone the signal honour of asking him a difficult question, you may be assured that you will get a detailed answer. Rarely will it be the most difficult of all answers - "I don't know.""

And at times, the "cock and bull" story these experts come up with is largely to generate more business for firms they work for. "On the economic side there is no denying that the more financial predictions you make, the more business you do and the more commissions you get. That, we all know, is not the right way to act at all. But I doubt if there are many, or any, Wall Streeters who sit down and say to themselves cool, "Now let's see. What cock-and-bull story shall I invest and tell them today"... The broker influences the customer with his knowledge of the future, but only after he has convinced himself," writes Schwed.

The other kind of prediction maker is the chartist or the technical analyst, as they are popularly known these days.

Schwed writes, "He arms himself with a chart (the simplest sort of graph) which depicts the ups and downs in price of the market as whole or of a commodity. This he studies, well away from the news ticker. It is his claim that he can discern in this jagged pattern of behaviour, which reproduces itself, and that certain of the peaks, valleys, and wobbles tell him when it about to do it again."