Model Gone Mental

https://www.bloomberg.com/news/articles/2021-08-21/wall-street-just-as-baffled-about-markets-as-it-was-last-year?srnd=premium-asia

This article on Bloomberg just sums up accurately the confusion that is persisting among those who are investors and the ones who manage their investments

Who by the way are just as human as the investors whose money they manage.

Over time people develop short-cuts to make sense out of what’s happening around them.

Behavioural analyst while recognising these short-cuts suggest creating “mental models’ that can help you quickly analyse a situation and respond.

Mental models help you make sense of the world.

In a famous speech in the 1990s, Charlie Munger summed up the approach to practical wisdom through understanding mental models by saying: “Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. You’ve got to have models in your head.

However as usual you can’t become a servant of your mental model.

The idea is to demystify the complex equation which shouldn’t make you assign arbitrary premium or discount to it.

The article above says-Twelve out of the 21 forecasters tracked by Bloomberg expect the S&P 500 Index to fall into the holidays. The spread between the highest and lowest target is 24%, the third-widest in nearly a decade.

The uncertainty is just as acute among some Treasury analysts, with those at Bank of America assigning a 100-point range to their 10-year yield forecast for the end of 2021.

If the professionals with all their tool kits and data can’t make sense of things than can you expect retail investors to do so.

The conflicting issues at hand are:

  • Are Markets overheated?
  • Is inflation here to stay?
  • Why are bond yields still so low?

The baggage of linear thinking models makes people ignore the underlying.

Let’s look at some simple data.

Nifty on March 20, 2020-8745

Nifty EPS on March 20, 2020-INR 443

Nifty P/E on March 20, 2020-19.72

Nifty on March 19, 2021-14744

Nifty 1-Year Forward projected EPS- INR 735

Nifty 1-year Forward projected P/E-20

So from the bottom till now, do you see a big difference between valuation.

The speed of the rally was met forcefully by the speed of earnings growth.

And as it often happens when something unexpected like this happens-“mental models” crack.

You can use the above to solve for the other 2 problems above.

Here is another example that will sum-up the argument for you.

If you notice there is not even 1 year in 6 that any expert came close to projecting the accurate EPS and price target for the company.

These are data points and often the outlook is short-term that can often ignore the drivers other than last quarter earnings which get projected into future.

n companies that have a track record of thriving in times of trouble. 

The bottom-line is “It’s really hard to know, it’s just so hard to predict so let’s prepare,”

The key is to focus on quality of what you are holding and let time do its magic.

Follow my twitter handle @manver1974 for more such shares.

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