Forecasting tips for analysts

The best book I read in 2015 was probably Superforecasting. It is about a project created by IARPA (Intelligence Advanced Research Projects Activity) to find phenomenal forecasters. Through a competition they identified a team of superforecasters who predicted extremely complicated events with great success. On closer look the author also found out that these people have some common characteristics.

I don’t want to recreate the wheel and make another review of this fantastic book. In fact I would highly recommend people to read the book. There are also some great podcasts that came out recently featuring the author Philip Tetlock. I would recommend the one by Econtalk and another by Freakonomics.

Unknown to many of us, we are actually continuously forecasting in everyday decisions. For example, deciding to use a certain route to go to work to avoid traffic involves forecasting.When we delay buying something in anticipation that price can come down soon, we are making a forecast. People in my profession pretty much earn their bread and butter by trying to make ‘educated’ guesses about the future. Our predictions fail often as much as we get them right. But as two highly respected seniors in this field told me, the difference between a great investment manager and a not so great one can just be a few % of right calls.

The book made me think on the subject of forecasting and reflect upon the mistakes I made in my career. As part of this exercise here are some of my thoughts on becoming a better forecaster.

  • Being humble: In his book, Tetlock mentioned that Superforecaster’s are usually not arrogant (as most of us would expect). However they do feel good about themselves when they get forecasts right. My personal belief is that we should try to be humble about our forecasts not for the sake of being a better forecaster but for dealing with our failures when we get things wrong. This is because the only thing certain about this profession is that we will fail. And fail repeatedly. Sometimes the inability to ‘win’ can have severe emotional repercussions and in my view being humble allows one to deal with such situations much better.
  • Dealing with biases: Biases are the biggest enemy of analysts and forecasters. Even though we are aware of of biases, it is hard to keep them at bay. In any case, we do need to have a very open mind on alternate scenarios that contradict our thoughts. In my view it helps to decide in advance what the alternate scenario’s are and decide what might make us change position. I also have another controversial suggestion. Avoid making forecasts in public (in newspapers or television). This is because once we choose a particular side in public it is very hard to make an u-turn even when the facts are right in front of our eyes.
  • Active vs passive analysis: One of the best books I read on equity research was ‘Best Practices for Equity Research Analysts’ by James Valentine. My biggest takeaway from that book was understanding the difference between active and passive analysis. The passive analyst waits for information to come to him. He gets bombarded with a mountain-load of news and information and is always busy catching up. The active analyst on the other hand decides what he wants to focus on. He knows the critical factors related to the topic and actively follows those (and can pretty much ignore most of the rest). Some of the Superforecasters in Tetlocks book also do the same. They don’t read newspapers but figure out the best way to find answers to the particular question in hand.
  • Triangulation from various sources: Triangulation is the use  of various sources of information and combining them to come to a conclusion. This is also a suggestion that is common in both Tetlock’s and Valentine’s book. When I look at my research method, I feel that my greatest weakness is that I spend too much time in front of my computer and too little in the outside world where I can meet with industry people, sector experts, customers, suppliers, competitors etc. By narrowing down my sources of information I definitely risk the possibility of overlooking valuable factors.

This is by no means a comprehensive list. Being a great forecaster requires one to have a ton of knowledge on the subject to begin with. Experience also plays a big role. My aim with this post was to offer some unconventional tips to readers. Would love to hear your thoughts on the matter.

Asif Khan, CFA

Asif Khan is presently a Research Analyst (Financial Sector) for Exotix which is a frontier market focused investment bank. He has more than 6 years of work experience as equity analyst in both buy and sell side roles across Asian frontier markets. Asif is a CFA Charterholder and has a dual major in Finance & Economics from North South University.

6 thoughts on “Forecasting tips for analysts

  1. Thanks for sharing your golden experience in the industry.

    Your insight of thoughts have really motivated coming analysts like me. Thanks in folds.

    I will be glad for your helpful resources for beginners – hoping for self study mechanism or young junior analysts that will help us grow in the profession especially the aspect of financial modelling.

    Regards

  2. Vaiya , I search this book but I didn’t get any free version. Where I can find ‘super forecasting’ PDF version? Vaiya if possible give me any download link. I am highly interested to go through that book.
    Thank you…:)

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