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The Perceived Value of a Forecast

January 13, 2014 | About:

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Tannor Pilatzke
I am a self taught investor through Warren Buffett, Charlie Munger, Ben Graham, Peter Lynch, Joel Greenblatt, David Einhorn, Seth Klarman, Howard Marks, Phillip Fisher and Thornton O'Glove. My focus is a bottoms up Value-GARP strategy with a mix of top down contrarianism.

"When you find yourself on the side of the majority, it is time to pause and reflect." - Mark Twain

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Comments

AshishGupta
AshishGupta premium member - 3 months ago

"The risks of being out of the game are huge compared to the risks of being in it."

I learned that the hard way last 2 years.

TannorP
TannorP premium member - 3 months ago

I am sorry to hear Ashish, sometimes we must learn some things ourselves. It also easier to say with hide sight bias what should of been done but it will drive you crazy. We have to play the hand we are delt the best way we can, much like poker, you are not wrong because you lose money and you are not right because you gain money. What matters is that the process was correct. I could say with hind sight bias I should have levered to the moon with LEAPS and borrowed money, but this process is clearly a flawed one over the long-term. Owning a pieace of a businesses is all investing is on the most basic level, if the collective universe of businesses are all overvalued on average it does not mean they are all overvalued and a deal can not be found.

There is a funny joke statisticians tell, "The confident statistician crossed a puddle that was on average 3-feet deep, he drowned."



AlbertaSunwapta
AlbertaSunwapta - 3 months ago

Forecasts are fun to read to see what factors are being considered, thus pointing to a range of outcomes despite the 'fact', that it's highly unlikely that any forecast will be very accurate.  The value is in opening up one's mind to the possibilites as we all inherently have a forecast buried in our minds of what is to come.  

Buffett himself talks of his optimistic view of the US in the future.  And there's absolutely nothing wrong with that.  Despite what he himself says, there's still a chance that he will be right.  Since none of us truly can know, why not adot the most optimistic view of the future and enjoy life while it lasts.  

Some great quotes for you:

“The only function of economic forecasting is to make astrology look respectable.” - John Kenneth Gaibraith (economist)

When asked; Why do economists forecast when they have such a poor record of successful forecasting, I believe Gailbrath also said: "Because people ask them to."

 

"I am reminded of the story Nobel Prize winner Ken Arrow tells about his experience trying to make long-range weather forecasts for the military during World War II. He told his superiors that his forecasts were so unreliable as to be useless. The word came back that the General knew his forecasts were useless, but needed them anyway for planning purposes. " - Bill Miller, 

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." - JM Keynes

 

A further comment. Regarding the earthquke prediction probability commentary below, it shows how prections can be wrong, however if one looks at eruption predicatability, Mt. Pinatubo and Mt. St. Helens predictions saved hundreds of thousands of lives.  My understanding was that the Mt. Pinatubo prediction was quite the feat of anaysis.  Bottom line: Better safe than sorry.  "Rule number 1: Never lose money, Rule Number 2: Never forget Rule number one." - Buffett  Moreover, Buffett has said he thinks every day about what may go wrong.  He really watchs the downside and I suppose that is a prime determinant of why he's had such a great upside.

"Take the prediction by Bailey Willis of the 1981 earthquake in Peru that was supposed to be 9.9 in magnitude. This prediction ended up causing mass hysteria and real-estate prices to plummet simultaneously across the country although no serious earthquake came. These types of forecasts can have such strong affects of attraction that they become self-fulfilling, or so repulsive that they become self-defeating, hence the term "self-fulfilling prophesy."

TannorP
TannorP premium member - 3 months ago

Thanks for the comments Alberta,

I espiecaly like the quote by JM, Keynes.

I completely agree with opening your mind to advise, other opinions or predictions. The problem though I might add is that these are all things that are given away freely, we must be careful we only consume what the opinions/advise/predictions worth having (paraphrasing Richest Man in Babylon)

Again I whole heartedly agree that it is healthier to have an optimistic skew to life, part of the reason I identify as a skeptical optimist.

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