July 9, 2018 glacierinvest

You know what really bugs me? Predictions. The prediction market is a saturated commodity market for the most part, in my opinion. Granted, there are a lot of smart people whose job it is to make predictions but there’s too many in my opinion and I often find myself suffering from prediction fatigue. If you predict something will happen long enough you’ll usually end up being “right” at some point, assuming you live long enough (i.e., predicting a recession versus predicting the end of the world). But are you really right if you never put a time frame on your prediction or kept pushing it out as the initial time frame elapsed?

On a related side note, I was an equity analyst in a previous life at multiple reputable brokerages and used to make predictions such as earnings and price targets. As analysts, we were right sometimes and we were wrong sometimes (some of us more than others). Management guidance took a lot of the sport out of the prediction business as you basically knew within a fairly tight range where results would end up. As a result, we were forced to focus on other factors that might not be model based, which actually was a good thing because it forced us to develop proprietary edges. For some analysts that edge was industry contacts and data that provided real-time or near real-time insight into revenue and/or margin trends. For others, it was an uncanny understanding of market psychology and how that was impacting a specific sector or stock’s valuation trends. And for others, it was an adept ability to synthesize macro factors with industry specific factors to formulate value add theses and detail that made clients money. There are a lot of potential edges but most of our clients weren’t interested in our predictions. They were more interested in the insight and context we could provide that was additive to their decision making process that might help them to gain an edge. That’s the real value add good sell-side analysts bring to the table.

Right now, it feels like everybody’s trying to predict when the next recession will begin. We hear about the effects of the new tax law wearing off along with rising interest rates, flattening and inverted yield curves, etc… All of these things are interesting and worth tracking (maybe) but trying to identify what year or what half of a year a recession will occur is just silly. I don’t mean to insult any of the highly intelligent and accomplished forecasters out there. I simply mean that telling me or anybody what year you think the next recession is going to occur isn’t that helpful unless you really have a tried and proven crystal ball. Even then, what am I supposed to do? What should I buy and what should I sell? How do you know what’s going to do well and what isn’t going to do well? Focusing on relevant insight and context as data and events evolve is what’s ultimately useful and adds value to any decision making process.

It’s hard to do that though as there is so much noise out there that competes for our attention. The most important thing anybody can do, in my opinion, is develop and refine their noise filter so they spend more time on potential signals and less time on meaningless noise. That’s where the real value will be added.