The Folly of Forecasting

Just a brief intro this is a great article and chart I found on my colleague’s website While there are many good sell-side analysts ( I know many personally), as a whole their predictions are wrong as demonstrated below. The reason I believe this happens is becaue of heard behavior.

At the end of the article there is a link to read the full article. You must register to read it. Although I almost never register for anything this is definitely worthwhile and time well spent.

Frank Voisin is a value investor and independent analyst whose site, Frankly Speaking, contains Frank’s investment theses as well as educational material to help investors avoid value traps. Subscribe to Frank’s feed here.

McKinsey & Company, the global management consulting firm, recently investigated the biases exhibited by equity analysts. McKinsey was testing for undue optimism or pessimism, and found that

Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.

The graph below shows the extent of the situation (Click for full size), showing analysts’ forecasts throughout the year vs the ultimately realized EPS for the year.

The Folly of Forecasting

Read the full report here.

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