A Surefire Way to Predict the Future - Common Sense Living Newsletter
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A Surefire Way to Predict the Future

May 15, 2015


Editor's Note: 'How do I know if this will work?' A reader wrote me recently with a great idea he had for a business. He described the business plan in a fair bit of detail - he had studied the market, decided on a niche segment, projected costs and profits, assessed the risks... it was a great idea.

But then he told me, having done all this work, that he was afraid to start.

Why? I wondered, surprised that someone with such a great idea and the wherewithal to create such a great plan, was still afraid.

'I can't be sure that this will work. How can I get a guarantee that I won't fail?'

Ah, the perennial human need to know what's going to happen to us in the future. We're constantly thinking, 'what if something happens?' and using that as an excuse to hold ourselves back from great things.

'I hate my job but I can't quit it. What if I can't find a better one?'

'I really want to try skydiving, but what if something goes wrong?'

Only if you tell me everything is going to work out fine and I will get a much better job with a lot more money and land gently on the ground with a fully-functional parachute... will I ever start off on any journey.

But I'm afraid no jyotishi... or tarot reader... or babaji... or psychic investment advisor for that matter... can guarantee a future for you.

You cannot predict the future
Source: Focal Point / Shutterstock

I recently read a piece my brilliant friend Rahul Shah, co-head of equity research at Equitymaster, wrote for his readers. Apparently this human need to predict the future is at its worst when it comes to the stock markets. He faces this irrational question all the time - where are the markets headed?

There is, then, no surefire way to predict the future. But in his piece Rahul Shah identifies a solution which will help you take steps towards a future without risking a complete wipeout.

Anisa Virji,
Managing Editor, Common Sense Living


Rahul Shah
For someone who researches stocks for a living, I often get asked by friends and relatives where the stock markets are headed next.

And mind you, I cannot be off by too much. It is as if there's some unwritten rule that the more time someone spends at the feet of Mr Market, the better his clairvoyance.

But this is far from the truth. In fact, the more I've tried to learn about stocks the more I am convinced that predicting stock market movements, more so in the short term, is an utter waste of time.

But I tried telling this to the people quizzing me and all I got in return are cold stares. I could almost hear them mutter under their breaths 'what a loser!'.

'All that matters in investing is buying fundamentally strong stocks at attractive valuations' I kept trying to explain in my sagest voice, but they wanted none of that boring wisdom.

Well, to be honest, I don't really blame them. They are displaying the same ignorance I would in front of, say, a heart surgeon.

A surgeon knows full well that a heart surgery is a complex procedure. So no matter how much experience and expertise he has, he simply cannot guarantee that a surgery will be successful. Yet when asked, 'Woh theek to ho jayenge na', a surgeon has to reply with a confident yes. Imagine a surgeon saying 'Thoda risk hai'. Chances are you will immediately shift the patient out and opt for someone who can fake confidence better.

It is apparent in both these and many other instances that one never knows what risks the future will bring.

Being honest and rational about it and making people aware of the risks involved is the most sensible thing to do. Yet, the person who is recommending caution is seen as a weakling... someone who lacks control and confidence.

It's a catch - 22. If you admit you don't know the future you lose confidence of your customers and clients. Instead, putting on a little display of confidence, acting as if you can predict the future with pin point accuracy, will make you a star.

But falling into this trap is the worst mistake you can ever make - and will only end in disaster.

As noted psychologist Daniel Kahneman observes, it is important that an environment is created where uncertainty is treated with respect. Not doing this would mean that the system rewards the most over-confident, and not the most rational, decision makers.

In other words, in any organisation we should acknowledge the fact that we do not have to be right. Instead, you have to accept that you are not likely to be right all the time.

This self-awareness will ensure that there are enough checks and balances in place. So that even if one decision is wrong, which it will be every now and then, things do not completely fall apart.

A brash, overconfident CEO who assumes that he is right all the time and therefore takes big bets, on the other hand, is not likely to survive in the long term, is he?

This brings us to Warren Buffett's concept of 'margin of safety', which is crucial to his success. Even though his style of investing has evolved over the years, what hasn't changed one bit is his habit of never ever underestimating the ability of the future to throw up nasty surprises.

And we should all accept this inevitability of the future. Irrespective of how much confidence you have in your ability to win, this will ensure that you do not get wiped out when you are wrong.

When you are about to embark on something - a journey, a venture, an investment opportunity, use the 'margin of safety' concept and make sure you have checks and balances in place, to ensure that no matter what the future throws at you - you emerge from it standing up, rather than wiped out.


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6 Responses to "A Surefire Way to Predict the Future"

Dakshesh Shah

21 May, 2015

Very Well Said Mr. Rahul Shah. It is like hitting the nail on its head. Margin of Safety, a surefire way to safer future.

Alok Sharma

17 May, 2015

I couldn't agree with the writer more. Human being by their inherent nature look for pattern in anything around them.....be it whether.....government....growing up of their children.....behaviour of society around them....stock market and so on......and despite finding so many aberrations along the way they are still not convinced.....they do not realise that most of the things in life are Random.....there is no pattern at all.... But still we can't give up trying.....to tell them "BE PREPARED FOR THE WORST AND HOPE FOR THE BEST"....

Like (1)

Prasanna Venkatesan

16 May, 2015

true, true, very true, Rahul, but no one appreciates it. The stock market is not for playful, quick buck makers!If they understand this it is OK! Otherwise God save them and their hard earned money.But Rahul, keep up the good work.

Like (1)


16 May, 2015

Good article


15 May, 2015

Sir,An excellent article that's going to change my whole life .Your prediction of our future has to take note of the margin of safety. That's an excellent. V.subburam


15 May, 2015

That's why it is said "no risk no gain".


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