The Perils of Prophesy
Investment strategies, of necessity, involve estimates and projections.
First, investors, as part of constructing a portfolio strategy, should, in conjunction with their advisor(s), prepare a carefully developed projection of their financial outlook and objectives.
Second, investors must recognize that investment decisions, designed to implement a portfolio strategy, rely on estimates of future corporate operating results, expectations for inflation, and interest rates among other factors. These other dynamics include both political and economic assumptions, usually prepared by others.
Estimates are just that – a projection based on the best information available at the time. Accordingly, it is essential to diligently make mid-course corrections as new information becomes available. For example, longer term estimates of corporate earnings should be reviewed after each quarterly report to assess the potential impact of current results versus estimated future earnings.
As noted above, investment decisions are generally based on estimates. Consequently, it is very important to understand the source and quality of any projections that are being employed to support the decision making process.
It is not unusual for estimators to have biases, and in some instances, agendas. Biased or agenda driven forecasts are frequently not revised to reflect new information, particularly if new data casts doubt on the original premise. Assessing the quality and source of estimates are an important part of the investment process.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®