Analysis and prediction

There are many who can analyze, but it is very difficult to find someone who confidently predicts. Because it is tough to forecast correctly, some even turn completely pessimistic about investors’ ability in forecasting. The track record of the mass strongly supports such a proposition.

But, without having a mastermind and long vision, it is not easy to survive. Even though it would be ideal to position oneself as invincible at all times, such hope comes true very rarely, and it is so rare that I find it hard to gauge which group outnumbers the other: those who successfully understands the future or those who take no ‘risk.’ But even for those who are capable of completely eliminating risk, the opportunity cost of giving up otherwise accompanied-potential gains could easily outsize the benefit of risk elimination. So, some degree of prediction is necessary, and whoever calls it dumb or futile is in denial.

In the quest for correct forecasting, what I find particularly interesting is that, so many good analysts fall into the trap of being good analysts. Logic, which by itself is highly subjective, gives hope to analysts that they may be able to explain many possibilities, hence it might seem as if the most valid argument is likely to turn out to be the most likely scenario. But it is not true. Most likely scenario is the one that results from the most thoughtful game theory approach, out of the options listed without the boundary in analysts’ imagination. Deep understanding of the simple yet real working of the psychology and economics of human lives adds true value to forecasting, hence to the investment. Good analysts have a good habit of collecting tangible and reliable evidence to prove them right, but the sort of thought that goes into truly valuable forecasting can be so discontinuous and dotted that it is often difficult to secure the data with actual-causal contribution even though the proxies are widely available, and displaying it in an understandable way for someone else is another big challenge.

Biggest challenge I faced when I wrote reports to the managers is that, when I have a high conviction on a certain view, the manager and I are two different human beings and so it is very hard to deliver all my considerations to him. I would answer more and more questions until I no longer remember the actual data but only my own conclusions (which, I admit, the managers have no good reason to rely on), and I could easily look silly and biased. For this reason, analysts could easily end up becoming a due-diligence agent rather than a thinker. This is a shame, as time is limited and due-diligence work requires less creativity vis-a-vis forecasting.

While I continue working on the expression and record keeping, I envy those who manage to express their views effortlessly. This could be the part that takes the longest time to mature in investment, not the actual investment management abilities. Especially, an apt use of analogies seem very powerful in simplifying and delivering esoteric ideas effectively, but I never had that ability well developed. I must be able to play down the noise to really know the essence of the issue to be able to use good analogies.

I’m on my long way there.