The Foibles of Forecasting

By Rob Shears on January 31, 2022 in Other

Don’t believe the fortune tellers. Photo: Crystal Dunn

It’s that time of the year again when the large banks put out their forecasts for the next 12 months. This forecasting makes these banks look very professional. They create wonderful presentations with lots of glossy pictures and charts. It is hard not to think they know what they are doing.
“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future,” investment guru Warren Buffett says.
There are some that listen to these forecasts like gospel and change their portfolios accordingly. The problem is that short-term forecasts (yes, one year is considered short-term) are often wrong.
A far better way to manage your wealth is to ignore forecasts and think long-term. This is exactly what Warren Buffett and Jeff Bezos have done to generate extraordinary wealth.
If you are thinking long-term, you want to own businesses that generate lots of free cash flow and have a very long platform for growth with management who are not going to do dumb things with your hard-earned savings. These opportunities are rare, so the idea of selling them because of a relatively low probability forecast is asinine.
Macro economics, market volatility, crypto, Evergrande, China, Russia, Trump, elections, pandemics, AI and robotics are all great news articles, however they have very little to do with the world’s best businesses. The world’s best businesses just keep producing cash regardless of this noise.
Some can slightly increase the probabilities of their short-term forecasts. This is great, however if you follow their recommendations, your trading increases and that can generate significant tax liabilities. After factoring in trading costs and tax, your returns from a strategy following short-term forecasts are likely to be underwhelming.

Rob Shears is an Authorised Representative of Valor Financial Group (AFSL 405452). This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.