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How useful is Forecasting (fortune-telling)
One Up
post Posted: Feb 10 2005, 11:52 AM
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In reply to: idribble on Thursday 10/02/05 11:28am

Yes, most people are unsuccessful at forecasting (stockamrket forecasters existign to make fortune tellers look good). Simply adding 5% each year to company profits is more accurate than broker predictions, on average.

But for people who have some ability in analysing companies, forecasting is worthwhile because without some idea of future profitability it is difficult to arrive at a valuation that is useful for investment purposes. At the least it is important to have some idea of whether company profits will increase next year, but not so important to forecast a profit figure to 2 decimal points. Both Peter Lynch and Warren Buffet, the two most successful investors of our time, say in unison that an ability to see where company profits are going is mandatory to achieve superior returns in the long run. However, as Buffet notes, if you have no skill in analysing companies (and many do not), then buying an index fund with the lowest annual fee is the best way to get exposure to the stockmarket. Idribble I think that would be a good strategy for you.

 
BSA
post Posted: Feb 10 2005, 11:45 AM
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In reply to: idribble on Thursday 10/02/05 12:28pm

Hi Dribs,

So far you have mentioned that the way almost everyone selects stocks is wrong, could you enlighten us please with how you select a stock/company smile.gif

Cheers



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idribble
post Posted: Feb 10 2005, 11:28 AM
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2nd Instalment ..........

Punters in the stockmarket are obsessed with forecasting. Analysts reports, T/A specialists, books on the stockmarket, newsletters, experienced and novice traders / investors on chat sites. Yet, very few are successful.

Probably the most talked about commodity is Gold. Go back in time to the late 90’s and ask a question. “What would happen to POG if the US was the subject to an unbelievable terror attack and war broke out with the US, Britian and Australia joining forces?” Experience and judgement would have forecast POG @ US$1,000 or more.

Potential, now there’s another often used word that convinces usually intelligent people to throw their hard earned at. Buying on potential is buying a stock that has had it’s palm read by a fortune-teller, and reported to you in various formats. Potential is one of the more alluring aspects of a stock and is legally allowed to be discussed in reports sanctioned by the corporate watchdog. See ASX announcements. How often is “Blue Sky” realised? The more potential, the bigger the premium you pay when you buy the stock.

Add potential to forecasting, predicting, judgement and experience as fortune-telling skills to avoid when selecting a stock.






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To win big you must be prepared to lose the lot.
 
idribble
post Posted: Feb 9 2005, 09:16 AM
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A formula for Failure

(Forecasting, based on T/A) and / or (Predicting events such as currency movements, CPI, housing approvals, motor vehicle sales, POG, sales, production costs, (a never ending list) etc) and / or (Judgement) and / or (Experience) as and aid to stock selection will be detrimental to success.

Investors / traders suffer from a strong belief that they are / or can be successful fortune-tellers. Beliefs are reinforced whenever successes occur and these alchymists are further driven into a mystical world ….. thus deepening their resolve to foresee the future.

Success is a result of picking a stock based on present circumstances not fortune-telling (subtly disguised as forecasting, predictions, judgement or experience).

All you are really doing is trading your perceptions against ohters' perceptions.

Your forecasting process will be incomplete, irrelevant and totally useless, unless you can accurately assess how much (what percentage) of the future appreciation in the share price has been factored in to the current share price. What’s the point of gathering all sorts of projections and data, doing the maths and arriving at a forecasted future share price when you have not assessed how much of your future gain is currently priced in to your stock?

The most important element to forecast, and the one that will have the most impact on your assessment of the future share price (and thus your future profit) is “How much (what percentage) of the potential appreciation in the share price has been factored in to the current price. If you have calculated the stock will rise 40c in the coming 12 months, what premium is on the current market price?





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To win big you must be prepared to lose the lot.
 
 


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