The Folly Of Forecasting: Ignore All Financial Experts
In the following weeks I will be sharing several of my favorite articles by James Montier. Here is one of Montier’s articles on the dangers of forecasting. (Click Here To Skip The Intro And Read About The Folly of Forecasting )
Article Introduction (Via DrKW Macro Research)
Both an enormous amount of evidence and anecdotal experience suggests that people are very bad at forecasting. This is often because we all tend to be massively overconfident. This begs two questions, firstly why do we persist in forecasting despite the appalling track record? And, more importantly, why do
investors put forecasts at the heart of the investment process?
Article Excerpts (Via DrKW Macro Research)
“Those who have knowledge don’t predict. Those who predict don’t have knowledge”. Despite these age-oldwords of wisdom our industry seems to persist in producing and using forecasts.”
“Several studies confirm professional investors to be particularly overconfident. For
instance, one recent study found that 68% of analysts thought they were above average
at forecasting earnings! I’ve found that 75% of fund managers think they are above
average at their jobs.”
“So what can be done to avoid these problems? Most obviously we need to stop relying on
pointless forecasts. There are plenty of investment strategies that don’t need forecasts as
inputs such as value strategies based on trailing earnings, or momentum strategies based
on past prices. Secondly, we need to redeploy the armies of analysts. They should return to
doing as their name suggests: analyzing, rather than trying to guess the unknowable!”
