Forecasting- Is it worth?

Jim Rogers, a legendary investor, was invited on Bloomberg TV to talk about the current economic environment in the world. [Jim Rogers cofounded and managed Quantum Fund with George Soros before starting on his own as Rogers Holdings and Beeland Interests, Inc ]

During this interview, Jim said, there is 100% chances that the US will run into the recession in 2016.

Few days later, I came across this twits.

Jim Rogers

To my surprise, Jim has been forecasting US recession way before 2008 recession ended as seen from the tweet. He has forecasted more than few US recession- one each year- in last five years, which is waiting to materialise. I am sure, if he continues his forecasting, he will be right some day. It is like “A Broken clock is right twice in a day. That does not mean, it is always correct.”

Apparently, he is not alone in forecasting. There is no dearth of the forecaster, you switch on Bloomberg, CNBC, and there will be one present, telling the viewer, what is going to happen. Many economist and analyst are predicting various economic indicator, oil prices and growth rates.

First, I was impressed and thought, these guys must be genius as they knew many things and they could predict (growth or company revenue) with high precision. So, I started looking for truth (empirical evidence) about forecaster.

Empirical evidences

James Montier has compiled some evidence of economist and analyst forecasts in his book Value Investing Tools and Techniques for intelligent investing. Here are few graphs about economic and analyst forecasts;

First, economic forecast: Below figure shows economic forecast and actual results from 1982 to 2009.

EconomicForcast

Second graphs displays forecast error of the USA equity research analyst between 2000 and 2006 forecasting company growth rates.

 

ForcastError

X axis indicates a number of months since forecast and Y axis indicate forecast error.

In the USA, the average 24-month forecast error is 93%, and the average 12-month forecast error is 47% over the period 2000–2006. Just in case you think this is merely the result of the recession in the early part of this decade, it isn’t. Excluding those years makes essentially no difference at all.

The data for Europe is no less disconcerting. The average 24-month forecast error is 95%, and the average 12-month forecast error is 43%. Frankly, forecasts with this scale of error are totally worthless.

 

AnalystForcast

There is an old saying that “Economist have predicted 9 out of 5 recession”.

 

In a recent interview with CNBC Warren Buffet said “You have all these economist who has 160 IQ and spend their life studying it, can you name a superwealthy economist who have ever made money out of securities? Keynes (John Maynard Keynes- the famous economist) actually tried to predict what the companies are going to do, but gave it later and moved to Graham style of investing”.

The fact is, most forecasters predict a future quite like the recent past. One reason is that things generally continue as they have been; major changes don’t occur very often. Another is that most people don’t do “zero-based” forecasting, but start with the current observation or normal range and then add or subtract a bit as they think is appropriate. Lastly, real “sea changes” are extremely difficult to foretell.

The experts forecasters do not  possess any magic wand or skills to predicate the future correctly. They may be right sometimes, but it could do due to sheer luck rather than skills.

I agree with John Kenneth Galbraith’s quote, “We have two kinds of forecaster: Those who don’t know – and who don’t know they don’t know.”

An investor will do himself a favour if he focuses on attention on “knowing the knowable”. Focus your efforts on analyzing companies and finding outstanding companies at an attractive valuation and do not worry about macroeconomic environment too much and paying attention to Chalie Munger’s below advice:

CharlieMungerOnForcasts

If you have thoughts/view, feel free to leave a comment.

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2 thoughts on “Forecasting- Is it worth?

    • Thanks, Daniel and I am glad you have enjoyed the article.

      I too have tremendous respect for Jim Rogers. He is a legendary investor, but I am not a fan of his- or any macroeconomist – forecast.

      I follow Warren Buffet and Charlie Munger advice on macroeconomic -of not listening to macroeconomic forecast. Instead, I focus my efforts on reading books and annual report.

      Regards,
      Parag

      Like

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