Why do people forecast when it doesn't work?
On Saturday'25th Feb, Warren Buffet released his annual shareholder letter. And as always, the crowd was in awe of his jaw-dropping wisdom.
In his newsletter, he stated that forecasting is really - a loser's job. It's quite impossible to predict, and almost impossible to state with any percent of certainty.
This got me thinking, it's true, isn't it?
As a matter of fact. Consider this piece from Morgan Housel back in 2019:
"There are more than 200,000,000 businesses in the world. Three hundred trillion dollars of financial assets. Ninety trillion dollars of GDP. Almost 200 countries, thousands of cultures, and norms. With seven billion people, a rough calculation shows there are about two tons of pure serotonin careening through the global economy at every moment. Economists try in earnest to model all of this in Excel.
Wrapping your head around the global economy – predicting recessions, bubbles, GDP growth, and the like – is nearly impossible. There are too many moving parts.
But that doesn’t mean we should give up trying to understand it. It just means we should keep things broad and simple.
One of my favorite quotes is from John Reed, who writes in his book Succeeding:
When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles – generally three to twelve of them – that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.
This is so applicable to economics, where there are infinite details but a few core principles that explain a lot of what’s going on."
Despite the complexity, things do keep on being pursued.
However, how often do you see forecasts being right? Rarely.
This is an image of the forecast made by the Fed right before the GFC in 2008. They also stated that forecasts by economists rarely work.
As long as forecasts are broad scale, it could make sense to have a slight inclination towards believing them. But remember, the more precise the forecast, the higher probability of it being wrong.
Whether it makes sense or not, it's tough to say. But if you are a retail investor, it really doesn't matter one bit.
No one can get longer hauls right. But you can always be prepared for the worst.
Cheers!
End-Week Wisdom:
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