How Does Forecasting Impact Investment Decisions?
The financial markets present investors with myriad challenges and opportunities. The determination thereof warrants scrutiny of the technical and fundamental factors governing the underlying assets. There are innumerable categories of financial instruments, including stocks, commodities, indices, forex, and fixed and movable assets.
Of course, investment options span the entire spectrum, including contrarian options. These include cryptocurrency, leveraged ETFs, frontier markets, distressed assets, alternative real estate, P2P lending, commodities with cyclical volatility, CFDs, startups, venture capital, precious stones, and collectibles.
With such a widespread field, it can be somewhat intimidating to forecast movements in the financial markets. Fortunately, various tools and resources exist to empower investors, enabling informed and strategic decision-making. Let it be known from the outset that there is no substitute for good old-fashioned groundwork.
The most critical step an investor can take is to understand the assets in question thoroughly. This involves careful and methodical analysis of demand and supply dynamics, complementary and substitute products, market conditions, geopolitical developments, fiscal and monetary policies, and broader macroeconomic trends.
Financial forecasting and modeling, supported by advanced statistical tools, data analysis, and hypothesis testing, are invaluable in forming sound investment strategies. And yet, even the most sophisticated forecasting models cannot accurately predict market activity. There are simply too many uncontrollable variables at play.
It would be simpler if price movements were wholly related to demand and supply considerations. Unfortunately, they are not. The prices of assets and the direction of movement are uncertain at best. Many reputable authorities have cautioned investors about relying on their assessments of the markets vis-Ã -vis absolute risk mitigation.
Do Investors Consult Fortune Tellers for Investment Decisions?
There is a noticeable difference between fortune-telling on Wall Street (often called forecasting) and the ancient practice of fortune-telling through palmistry, tarot card readings, psychic readings, and the like.
An authentic fortune teller uses psychic abilities to provide personalized readings for people based on their present, past, or future concerns. While history has produced notable fortunetellers who may have forecast economic downturns or upturns, this is not the primary business of tarot card readers – that is the business of financial forecasting.
Just as financial forecasts rely on data inputs and interpretation, tarot readings hinge on the reader’s ability to provide guidance rooted in meaningful patterns. For those intrigued by the parallels, it’s certainly worth exploring expert insights into the accuracy of readings
Forecasting is a financial discipline, which, despite its best intentions, is often nothing more than confirmation bias. The quality of the reading, a.k.a. the economic forecast, is directly attributed to the inputs used to evaluate the markets.
Focusing on certain variables makes us more likely to generate a forecast that favors what we are looking at. If we exclude specific pertinent data (deliberately or accidentally), we are unlikely to generate an outcome that considers that. All market forecasts are based on probabilities, not certainties.
Of course, all sorts of biases may crop up, including loss aversion bias, overconfidence bias, recency bias, herd mentality, or anchoring bias. Sophisticated modeling software does a good job of including many variables in its forecasting system but remains prone to error.
The financial markets are primarily unpredictable. In the next section, we describe the volatility of the markets based on expert assessment from leading players.
Quotes About the Veracity of Market Predictions
- Financial Times – Never ever make predictions
- The Times – Market shocks now happen every month, says FCA head
- George Soros – The financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.
- Phillip Fisher – The stock market is filled with individuals who know the price of everything, but the value of nothing.
- Peter Lynch – You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready.
- Jessie Livermore – The stock market is never obvious. It is designed to fool most of the people, most of the time.
How Investors Approach Unpredictable Markets
Most investors approach the markets with a great deal of caution. This is the prudent approach to adopt. Given the seemingly limitless array of possibilities that can influence asset prices, it pays to pause and think about things. Technical and fundamental analysis are broadly used for pricing, direction of movements, and forecasting overall trends.
Technical analysis focuses on price movements and patterns. These are used to gauge future price trends. It’s like gazing into a crystal ball with a roadmap of past performance and a huge question mark as to the future performance of the underlying financial instrument.
A variety of tools is assessed, including MAs, RSI, MACD, Fibonacci retracements, and others. Support and resistance levels are scrutinized. Other aspects include volume and momentum, indicators, price charts, and patterns.
Fundamental analysis is focused on the intrinsic value of these instruments. That means it studies the financial statements, industry trends, and economic indicators. By shedding light on these aspects of companies and the industries within which they operate, assessments can be made about whether an asset is overvalued or undervalued.
Again, this uses existing information like income statements, balance sheets, earnings, profit and loss statements, as well as economic elements, to ascertain the viability of the asset within a broader industry.
It Is best to assess both elements and others when drawing conclusions. To be perfectly frank, there is no guaranteed methodology to anticipate price movements, demand, or the impact of uncontrollable variables on the financial markets.
It’s like a crapshoot, and insiders with sophisticated trading platforms, deep pockets, mega investments, and firsthand knowledge of what’s about to happen always have the best chances of success. For a novel look at this topic, consider Crystal Balls and Market Calls by Jerry Wagner!
