Investors should not trust forecasts

forecasts

Buffett admits he has no ability to forecast

In his 1966 letter to shareholders, Buffett set out his views on investor should care about company performance but not market performance. The following parts in italics are my complete excerpts:

“I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.”

In Buffett’s 1994 shareholder letter, Buffett went a step further by detailing his view that investors put too much faith in forecasts.

No one can forecast correctly

We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.

Buying good businesses at reasonable prices

But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of
capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results.

Price, not time

We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?

Make the numbers

Buffett also said in his 2002 shareholder letter:

Charlie and I not only don’t know today what our businesses will earn next year – we don’t even know what they will earn next quarter. We are suspicious of those CEOs who regularly claim they do know the future – and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to “make the numbers” will at some point be tempted to make up the numbers.

My view

My personal opinion is quite different from that of Buffett. I have also expressed my opinion on this subject many times in my book.

A discussion of this topic in my book

I discuss this topic in almost the entire section of chapter 6, subsections 6-5, pages 297-302 of the book “The Rules of 10 Baggers“.

Most investors do need

Because most investors who are retail investors, especially the more conservative investors, still need listed companies to be able to give estimates of their future business and prospects. The estimated value does not need to be very accurate, nor is it a random guess, but at least it needs to have a range, so that investors can have a rough outline of the company’s future operations.

Most investors need it because they cannot keep an eye on the stock market like professional investors. Retail investors need to have a guiding direction, so as to have a general outline and direction for the future operation of the stocks they hold.

Companies are willing to provide

This is why most of the listed companies now, when the market and the economy are flat, will give a range of estimates for the company’s next quarter, as well as the future business and outlook of the year. And don’t forget, in the annual report and annual shareholder letter of listed companies, the CEO will also express his views on the year and future business and outlook. All of these indicate that US stock companies basically agree and are willing to disclose the company’s future business and outlook to investors.

This is why from 2022 to the present, when the economic outlook is uncertain, many companies that used to provide financial forecasts, because they have become conservative, they really cannot provide a range of financial forecasts.

Objection to manipulate numbers

However, I am opposed to the situation where companies really cannot estimate future business and prospects, such as when the economic outlook from 2022 to now is unclear, and they just give forecasts. Because the predictions that are forced out will definitely become pure guesswork and irresponsible mistakes, which will be a kind of harm to investors.

The manipulated numbers must not be honored, and the result is only fake.

I believe that Buffett’s objection is referring to this situation (I agree with this part).

forecasts
credit: relexsolutions.com

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