In today’s Finshots, we’re talking about stock market predictions and human psychology.
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Alright, on with the story now.
The Story
Will the Sensex hit 1,00,000?
Yes!!!
“Finshots, what are you smoking?! There’s a war unfolding in Ukraine.”
Yes, we know. But hear us out, folks. We only said that it’ll hit 1,00,000. We’re not saying when it’ll hit that mark. As you can see, we’re taking the Wall Street maxim of “Forecast a number or a date. Never both,” very seriously.
Because getting both the date and index level spot on is hard. Very hard. Just ask James Glassman and Kevin Hassett. They’re the authors of the infamous book “Dow 36,000.” Now you’re thinking, “Hey, the US Dow Jones stock index breached 36,000 last month!” And it sure did. But guess what? They wrote the book in 1999. And predicted that the Dow would hit 36,000 by 2004!!! Their prediction was off target by a cool 18 years. So it made them the butt of many jokes during that period too.
And we’ve seen such predictions about the Sensex too. Like this one from 2014.
Despite knowing that our predictions can go horrendously wrong, we can’t help ourselves. We still want to keep doing it. It’s like we’re all in a toxic relationship with predictions.
And while at Finshots we aren’t so brave with our predictions, we have others who’re braver than us. Like Chris Wood of Jefferies. He says that Sensex will hit 1,00,000 within 5 years! That’s right, a 6 figure Sensex by 2027. It seems quite outlandish, doesn’t it?
But wait…what if we were to “frame” this prediction differently?
What if we ask you — Do you think the Sensex can grow by 12% every year for the next 5 years?
Now you’re thinking, “Hey, that’s reasonable. The stock markets in India have indeed grown at 12% in the long term. The economy is recovering from the effects of a pandemic, so that will speed up growth too. And at the end of the day, 12% is only slightly above what India’s nominal GDP growth (total rise in economic output, including inflation ) could be. You’d expect businesses to at least keep up with that.”
Suddenly, the Sensex at 1,00,000 seems to be a pretty easy target!
You see, how we frame the prediction also matters. If Chris Wood simply said that the Sensex could deliver a yearly return of 12% over the next 5 years, we wouldn’t have batted an eyelid. We would’ve shrugged and just got on with our lives. But because he predicted “1,00,000”, we all sat up and took notice. 1,00,000 is bold. 12% is boring. In reality though, they’re two sides of the same coin.
However there’s still a problem with most of these predictions. And it’s again to do with psychology. We told you, this edition is all about psychology!
So, if you look closely, you’ll see that these predictions suffer from something called the recency bias. It basically means that the people who dole out predictions make the mistake of expecting the market to continue its good or bad behaviour. If stocks are doing badly, you’ll only see predictions saying how much lower the Sensex will fall. If stocks are doing well, you’ll see predictions like 1,00,000 for the Sensex.
Take Glassman and Hassett again. When they made their prediction in 1998/99, the US was in a roaring bull market. Tech stocks were going to the moon! And these good folks predicted that nothing would stop the bull run. So out came the prediction of 36,000 on Dow. But the stock market doesn’t care for what you feel. It has a mind of its own. So, instead of continuing to move up, the Dow cracked from 11,000 in 2000 to 8,000 in 2003. And the prediction flopped miserably.
And Chris Wood’s prediction? Well, he made that when the Sensex hit 60,000. But wait…what if 60,000 was the peak of the market? Just like 11,000 was the peak for the Dow back in 2000. , What if the war in Ukraine intensifies? And maybe, unlike other geopolitical events in the past, this war triggers investors. The Sensex crashes by another 10% and falls to 50,000. Seems plausible, right?
Suddenly, you need the stock market to rise 15% every year if you want to hit the 1,00,000 target by 2027. What if it falls further to 45,000? Well, then it would have to rise 18% every year for the prediction to come true. And what if there is another pandemic, another war, another tech blowout, something else that we haven’t foreseen within the next few years? The market could face another steep decline then. There are so many ifs and buts.
Let us leave you here with one more thought on “framing”.
In 2008, the Sensex hit 21,000. In 2022, it hit 60,000. On the face of it, it’s quite a jump and you’d be cursing yourself if you missed investing.
But what if we tell you that in percentage terms, the annual returns was a measly 7.7%?! Quite shocking, isn’t it?
So there you have it. All we want to tell you is not to fall prey to all these fancy predictions. The Sensex will hit 1,00,000. We just don’t know when.
Until then..
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