My last blog post focused on some tips on forecasting which were fairly qualitative . I thought that it would be great to follow up by discussing a few technical mistakes done during company valuation. While trying to forecast company performance and valuing companies, we often fall victim of what I would refer to as the ‘routine trap’. That happens when we apply certain methods without understanding the logic behind those assumptions even though situations and circumstances could be very different and require changes in methods. Thus we end up with inconsistent company valuation. Let me go a bit deeper into few common areas of mistakes. Be warned that this will be a fairly long post.
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.