Warren Buffett has plenty of insightful quotes about pretty much any investment situation you could think of. One of them deals with forecasting.
“Forecasts can tell you a lot about the forecaster. They don’t tell you about the future. “
I recently saw a chart showing the future projections for the federal funds rate. These are based on futures contracts that are traded on futures exchanges.
As you can see from the graph, these predictions are often very wrong and very wrong. That is why you should always make forecasts with a huge grain of salt.
If you look at analyst estimates for the S&P 500’s earnings over the past 25 years, you can see that the estimates often differ. They usually start out as being overly optimistic until they gradually decrease to a lower value. It’s fascinating to see that in just five out of 25 years, the estimates of the S&P 500 result actually turned out to be more conservative than reality (a positive surprise).
For 20 out of 25 years in question, the analysts were too optimistic and the actual profits were lower than forecast (negative surprise).
The point is, you should always take someone’s opinion or estimate with a grain of salt (mine too). Typically, from your own research, you should have enough conviction to pursue your investment strategy and ignore the noise. Proper risk management process is very important because 100% of the time nobody is right. So it is important to lose little if you are wrong, but to maximize profit if you are right.
In my investment, I try to focus on key trends and issues that have logic behind them. For example, I agree with Peter Lynch that if you spend more than 13 minutes a year worrying about macroeconomic indicators like interest rates, you’ve wasted 10 minutes.
Instead, I try to focus on individual companies that have certain characteristics like moats, brands, and intangibles that keep their competitors in check. Some of these companies also serve basic human needs, which means the demand for them is less cyclical and repetitive in nature, which is a good sign for sales, earnings, and dividends. I’m pretty confident that people are eating junk food, drinking alcohol, smoking, waging wars, washing hands, brushing teeth, wiping, using spices, using cosmetics, using cars for their pets, making trash, paying for phones, paying for medicines etc.
On the other hand, I don’t think even the Federal Reserve officer has any idea where interest rates would be in three months’ time.
So, are you going to New York and studying this fancy book? “And I said,” Yes sir. “
He replies by saying, “You don’t need any of this. I’ll tell you everything you need to know in one sentence.”
I started to think to myself, “Okay, here it comes.”
He says, “Eat them, drink them, smoke them, go to the doctor and look good when you get there.”
I was just looking at him so he says, “Okay, I know you’re a little slow so I’ll repeat it. Eat them – your food
Companies. Drink ’em – your beverage manufacturer (soda, milk, juice, beer, hard alcohol). Smoke ’em – Your Tobacco company. Doctor – your health company.
He pauses for a moment and says, “You’re engaged, aren’t you? Let me tell you about your future Bride. “I started to think that you’ve never met my fiancée. He says,” She’ll allow the house Burn down around her before she goes in public with her hair and nails done. So this is my last Category; Cosmetics, beauty articles.
Then he said, “Look, if you invest in these categories, you will never become the most popular kid in the world Cocktail party. But you won’t blow up your customers either. “