As soon as 2016 started you might have come across almost a dozens of columns in the newspapers, online and magazines about ‘how to make money in 2016’ and where the best returns will come from in 2016.

Most of them are waste of time and you would have been better off ditching them and spending quality time with your family or going on holidays.

Forecasting doesn’t work

The cleverest advice I received on forecasting is that if you want to be successful at predicting market, I should simply do it often. To my surprise many professionals and individual investors and traders do that. As a finance and equity market professional we are regularly asked for insights that stem from our crystal ball gazing or through our experience. Those that get it right are lauded as if they have an almighty connection to the future, and such is the brevity of our memories, those who get it wrong are forgotten.

These self-proclaimed prophets do also have ability to spin their incorrect predictions into divine prophesy that they see no lessening in their monthly newsletter sales or subscribing their TV channels. I recall one of the high profile commentator stating with almost daily certainty that Indian stock market (NSE) would end 2015 above 9,000 points. At the time prediction was made the market was indeed close to those levels (around 8900). Offcourse the market ended significantly below 9,000 levels and traded below 8,000 levels after the prognostication was made. But in early 2016 the same commentator started justifying his call by mentioning that all this happened because of the road block of new regulations that did not turned into law.

Desist from forecasting altogether

Long-term investing success is nothing to do with forecasting share prices, politics or economics and everything to do with buying businesses whose intrinsic value rise over the long run. The share price will look after itself if the value of the business is rising steadily over the years. To offer any forecast of where the stock market will be, demonstrates a lack of understanding of this basic investing principle. A forecast tells you a great deal about the forecaster but nothing about what is to come.

Those who think that they understand the machination of economy and the market and then offer their ‘insight’ simply haven’t learned that 1) they will never do better than 50/50 with their forecast and 2) their forecast aren’t required by you for you to be successful investor.

There is a constant temptation however to believe the facts one has collected to some undeniable insight about the future that one can bet his/her all savings. To save ourselves at Valueoperations from falling into this trap, with 50/50 outcomes, we developed a process. This process to us is not different to like marrying someone where we commit ourselves not to leave either in good or bad times. We publicly committed our investors, their advisers and even the readers of this blog to share our process and not to leave it in any circumstances we face.

At the beginning of 2015 I was asked, whether the market is cheap or expensive and I argued that market seems very expensive as prices had inflated a lot and will be very hard to achieve any meaningful returns.

It isn’t wise for any fund manager to come out and say this to its investors. It risks influencing investors to zip up their wallets. Of course, while we may have been right (50/50 remember!) with our prognostication – for the year 31st December 2015 the NSE 50 index declined by almost 5%, add in the dividends of approximately 2% giving a negative return of -3% for the year – the Valueoperations funds returned significantly outperformed after all fees and expenses. On top of that investors also gained because of fall in Aussie dollar. In other way to say last year was our best year compare to last four years. If I had been accurately predicted a decline of 3% of the market and decided the risk outweighed the benefits, so listening to myself, put all my money in the fixed deposit, I would have missed the strong return.

Invest in strong businesses and be patient

And that’s the point. You should be investing at rational prices in businesses you are reasonably confident, if not virtually certain, will be materially larger and least equally profitable in many years hence. General stock market and economic forecasts are largely irrelevant over the timeframe I am contemplating.

When we observed in early 2015 the market was expensive, we also noted that investors were dangerously behaving towards the political optimism. We found many banks, minerals, infrastructure and NBFC businesses were trading at very expensive prices. As soon the market started factoring all and started heading down we picked up quality businesses that we like at our price! We did have luckier and were happy when prices did fell more and we accumulated more.

A business adds value by retaining profits and redeploying that incremental capital at attractive rates of return. It’s that simple. To maximise your returns, you have to fill your portfolio with companies able to retain large amount of capital and generate large returns on that capital. The share price of these companies will look after themselves in the long run.

The short run is merely the period over which stock prices of these companies overreact on both the upside as well as downside and therefore it is the period over which you can take advantage of the markets manic moods.

Ignore everything else in 2016 and you should do well over the long run.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise to take professional advice before going ahead with our views.