Forecasting the Future: Part 2


In part 1 of this series on forecasting future results as the key to investing success, I suggested that reviewing consensus analyst estimates was a smart and prudent starting point. Furthermore, I attempted to illustrate that consensus estimates tend to be accurate enough to help you determine whether a deeper dive into the company is warranted or not. However, I also suggested that it’s imperative to go beyond simply looking at consensus estimates before you make your final investing decisions.

In simple terms, reasonably accurate forecasts are ultimately achieved as a process commonly referred to as research and due diligence. Just as I pointed out in part 1 that consensus estimates would not be perfectly accurate, this same principle applies to all forecasts and/or estimates. We must recognize that the only thing certain about the future is uncertainty. Therefore, we must also accept that investing based on our best forecasts is not a game of perfect, nor does it need to be.

In point and fact, as I stated in part 1 when I evaluated United Technologies, the direction of future growth is just as important as getting the number as correct as possible. In other words, at its most crude level you are attempting to forecast whether the company will be growing or shrinking. If it is growing, you are likely to generate a positive rate of return, and vice versa. Of course, the actual return you eventually will earn will be functionally related to specific growth the company achieves.

Additionally, I believe the best way to accomplish a forecast that is reasonable within an acceptable range of probabilities is by applying both a macro and micro analysis. However, by macro I am not implying attempting to forecast the economy or political events. Instead, I believe that investors should focus on the major macroeconomic trends that identify the possibilities of major future investment opportunities. There are two that quickly come to mind, analyzing and monitoring demographics, and focusing on the potential of technological advancement.

The Macro Approach

Regarding demographics, perhaps the most important factor to recognize is the current distribution of our population. We still have the bimodal powerful demographic forces of the graying of America and the baby boomer generation. Additionally, we also have a rapidly growing economic force associated with millennials which are those people born in the 1980s and 1990s. The Pew Research Center recently defined our current population demographic makeup as follows:

  • The Silent Generation: Born 1928-1945 (73-90 years old)
  • Baby Boomers: Born 1946-1964 (54-72 years old)
  • Generation X: Born 1965-1980 (38-53 years old)
  • Millennials: Born 1981-1996 (22-37 years old)
  • Post-Millennials: Born 1997-Present (0-21 years old)”