There are three main types of estimates of the future. In order of increasing sophistication, they can be referred to as the naive, the gullible, and the expert.
- The naive forecast is based on linear trend extrapolations.
- The gullible forecast is based on analysts' estimates, such as provided by S&P Compustat's Analysts' Consensus Estimates, ACE, or by Institutional Brokers Estimate System, I/B/E/S.
- The expert prediction is based on rigorous systematic study of a company, its industry, and the economy.
- facts about the present, on one hand, and
- opinions about either the speculative future or an ideal state on the other hand, respectively.
The important point here is that statements about future earnings growth rates are normative, not positive. They are opinions, not facts.
- No one's crystal ball is any more reliable than any one else's.
- Therefore, if not self-reliant, then one must rely on the expert opinion of others who have different agendas and conflicting interests.
- They are not reality, but rather utopian ideals approached by stock markets as complex aggregates but not by individual stocks.
- Perfectly efficient markets are necessary as a fixed standard for comparison, and thus serve a useful methodological function.
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