The street smart do not try too hard

When I started with the stock markets, I was amazed at the different things I needed to learn. As I learnt about price-earnings (P/E) ratio, somebody mentioned about P/E rerating. When I figured that out, derating dropped by, then came dividend-yield and other ratios.

Suddenly, one day, the person who was writing a weekly derivatives column was hired by a foreign brokerage, which did not allow people to contribute to newspapers. Therefore, on one sad Saturday, I was found dialling my battery dry for a crash course on open interest, implied volatility and put option build-ups, so that I could cook up some 500 words of derivatives predictions for the Monday paper.

While all this made me aware of different indicators used by different types of screen gazers, it was also making me a bit more confident about my own predicting abilities. A self-anointed 'king of the markets' even promised that in a year's time I could also become a 'king of the markets.' What the phrase meant, I never asked, he never said. But I did not have any serious doubt in my mind that I was on course for that title. The Eureka moment came much later.

After a point, I realised that though I learnt more and more variables, their application did not improve my prediction powers proportionately. While the more information I could pack in gave me confidence, even the sum total of all the economic and other variables did not add up to a perfect forecast. *

Such a forecast began to become rarer and rarer as the one-way moves stopped. After the big boom that lasted for some four years and the big crash that lasted for over a year thereafter, the prediction game has become harder and harder as movements have become sideways. But this is not something new.

These thoughts emerged as I looked back at my tryst with the markets through a new prism provided by a 1981 keynote address made to a group of securities analysts titled 'Trying too hard.' I was lucky enough to be forwarded a pdf version of the draft that runs into some 18 pages. It is 18 pages of pure gold.

Comparing stock forecasts with quantum physics the speaker underscores the randomness of stock movements, long before Nicholas Nassim Taleb turned the concept into a bestseller and rubbishes ideas such as 'growth stocks' and 'growth markets'. Spikes induced by newsflows almost invariably get neutralised by crashes induced by newsflows sooner or later. The only credible indicator is the tendency of earnings and stock movements to revert to their long-term averages, according to the draft.

Irrespective of methodology followed, it is always helpful if one remains consistent over a long period. The speech also emphasises on the need to have a beginner's mind as against an expert's mind. A beginner's mind has unlimited options whereas an expert's mind has a set line of thoughts, which rules out solutions out of this imaginary box. It also wittingly explains how people deliberately make things sound complicated to make themselves look intelligent.

There is no great idea in stock picking or in quantum physics that cannot be put in simple words. Therefore, just keep a beginner's mind, be consistent in whatever you do and shut out on the self-serving, complicated nonsense masquerading as intelligence. Simply put, don't try too hard.