Forecasting or predicting the future is the 2nd oldest profession. It is now a multi billion dollar business.
The author examines about every major field where forecasting is used:
3. Stock market
4. Population sustainability
5. Scientific advances
7. Corporate predictions
Interestingly enough, the largest number of people in any of these 7 forecasting groups is the 200,000 people who do financial advising....involving trillions in assets. Weather forecasting only has about 6,000 people......but it is a $5B business.
The author contends the $200B spent every year on forecasting is wasted money.
The author submits evidence that financial newsletters are worthless with regards to predicting profitable investments in the future. He also correctly points out that active mutual fund managers can not beat the plain stock market indexes. He covers bubbles including MacKay's Madness of Crowds and the Tulip Bubble.
The author also contends that most superior innovations are made by combining different technologies. This reminds me of a Russian company I ran into around 1992. This Russian company said the Russian government did a study of all patents issued, and concluded all patents are a combination of about only 1200 basic ideas. Their business model was to include all 1200 basis ideas in software, and then problem solvers could let the software combine the 1200 ideas into an ideal solution. Unfortunately, the software I tried had too many bugs to get any practical use out of it.
Predicting the future can be hazardous to your health as well. In 1956, RCA predicted there would only be 200,000 computers world-wide by the year 2000.
In the 1970's, GE led the way in terms of utilizing corporate strategic planners.......with a staff of 193 planners. When the Japanese threatened to take over the business world in the 1980's, corporations abolished their strategic planning departments. Jack Welch of GE disbanded their corporate planning department.
The author suggests that companies should quit trying to plan for the future.......and instead empower their employees and train them to adapt to changing circumstances........analogous to the US military on D-Day. The Americans at the working level on the ground adapted and overcame obstacles. The Germans relied on a rigid central command structure with no empowerment of the troops at the scene of the action.
The author suggests 5 key questions you should ask whenever you are trying to assess the credibility of a forecast:
1. Is the forecast based upon hard science?
2. How sound are the methods used to make projections?
3. Does the forecaster have credible credentials?
4. Does the forecaster have a proven track record?
5. To what extent is my belief in a particular forecast influenced by my own personal beliefs and wishful thinking?
The author's 5th question reminds me of something I learned about consultants while in MBA School. If you are a consultant, your first job is to figure out who the decision maker is that pays your bill. Your second job is to figure out what answer the decision maker wants you to arrive at........then manipulate the data to arrive at the right answer!
All in all, an interesting and thought provoking read.
In this age of full disclosure, it can be noted that I am the author and publisher of the book INDEX MUTUAL FUNDS: HOW TO SIMPLIFY YOUR LIFE AND BEAT THE PROS. This book is an introduction to the concept of index funds is and is sold on Amazon. I am also a contributing author to the book THE BOGLEHEADS GUIDE TO RETIREMENT PLANNING available from Amazon with an estimated release date of October 2009. I have also written 21 short stories on investing which are also available on Amazon.
If you want practical ideas on long term passive investing, read some of the books below:
The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing
- Hardcover: 324 pages
- Publisher: John Wiley & Sons, Inc.; 1 edition (14 October 1997)
- Language: English
- ISBN-10: 9780471181781
- ISBN-13: 978-0471181781
- ASIN: 0471181781
- Product Dimensions: 16.1 x 2.8 x 24 cm
- Boxed-product Weight: 640 g
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