{"id":22430,"date":"2017-01-08T21:13:46","date_gmt":"2017-01-09T02:13:46","guid":{"rendered":"http:\/\/olduvai.ca\/?p=22430"},"modified":"2017-01-08T21:13:46","modified_gmt":"2017-01-09T02:13:46","slug":"the-problem-with-forecasts","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=22430","title":{"rendered":"The Problem With Forecasts"},"content":{"rendered":"<div class=\"title-wrap\">\n<h3><a href=\"https:\/\/realinvestmentadvice.com\/the-problem-with-forecasts-01-05-17\/\">The Problem With Forecasts\u00a0<\/a><\/h3>\n<\/div>\n<div class=\"pf-content\">\n<hr \/>\n<p><a href=\"http:\/\/realinvestmentadvice.com\/wp-content\/uploads\/2017\/01\/Problem-With-Forecasts.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-18853\" src=\"http:\/\/realinvestmentadvice.com\/wp-content\/uploads\/2017\/01\/Problem-With-Forecasts.png\" alt=\"\" width=\"898\" height=\"599\" \/><\/a><\/p>\n<p><strong>The Problem With Forecasts<\/strong><\/p>\n<p>We can\u2019t predict the future \u2013 if it was actually possible fortune tellers would all win the lottery.\u00a0\u00a0<strong>They don\u2019t, we can\u2019t, and we aren\u2019t going to try.<\/strong>\u00a0However, this doesn\u2019t stop the annual parade of Wall Street analysts from pegging 12-month price targets on the S&amp;P 500 as if there was an actual science behind what is nothing more than a \u201cWAG.\u201d\u00a0<em>(Wild Ass Guess).<\/em><\/p>\n<p><strong>In reality, all we can do is analyze what has happened in the past, weed through the noise of the present and try to discern the possible outcomes of the future.<\/strong><\/p>\n<p>The biggest single problem with Wall Street, both today and in the past, is the\u00a0consistent disregard of the possibilities for unexpected, random events. In a 2010 study, by the McKinsey Group, they found that analysts have been persistently overly optimistic for 25 years.\u00a0<strong>During the\u00a025-year time frame, Wall Street analysts pegged earnings growth at 10-12% a year when in reality earnings grew at 6% which, as we have discussed in the past, is the growth rate of the economy.<\/strong><\/p>\n<p>Ed Yardeni published the two following charts which shows that analysts are always overly optimistic in their estimates.<\/p>\n<p><a href=\"http:\/\/realinvestmentadvice.com\/wp-content\/uploads\/2017\/01\/Yardeni-Oper-Earnings-Forecasts-1979-1995.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-18855\" src=\"http:\/\/realinvestmentadvice.com\/wp-content\/uploads\/2017\/01\/Yardeni-Oper-Earnings-Forecasts-1979-1995.png\" alt=\"\" width=\"1064\" height=\"634\" \/><\/a><\/p>\n<p><a href=\"http:\/\/realinvestmentadvice.com\/wp-content\/uploads\/2017\/01\/Yardeni-Oper-Earnings-Forecasts-1995-2017.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-18854\" src=\"http:\/\/realinvestmentadvice.com\/wp-content\/uploads\/2017\/01\/Yardeni-Oper-Earnings-Forecasts-1995-2017.png\" alt=\"\" width=\"1086\" height=\"633\" \/><\/a><\/p>\n<p><strong>This is why using forward earnings estimates as a valuation metric is so incredibly flawed \u2013 as the estimates are always overly optimistic roughly 33% on average.<\/strong>\u00a0Furthermore, the reason that earnings only grew at 6% over the last 25 years is because the companies that make up the stock market are a reflection of real economic growth.\u00a0<strong>Stocks cannot outgrow the economy in the long term\u2026remember that.<\/strong><\/p>\n<p>&#8230;click on the above link to read the rest of the article&#8230;<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>The Problem With Forecasts\u00a0 The Problem With Forecasts We can\u2019t predict the future \u2013 if it was actually possible fortune tellers would all win the lottery.\u00a0\u00a0They don\u2019t, we can\u2019t, and we aren\u2019t going to try.\u00a0However, this doesn\u2019t stop the annual parade of Wall Street analysts from pegging 12-month price targets on the S&amp;P 500 as [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[2723,8511,2725],"class_list":["post-22430","post","type-post","status-publish","format-standard","hentry","category-economics","tag-forecasts","tag-lance-roberts","tag-predictions"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/22430","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=22430"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/22430\/revisions"}],"predecessor-version":[{"id":22431,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/22430\/revisions\/22431"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=22430"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=22430"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=22430"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}