How you can become a ‘superforecaster’
According to the renowned US researcher, Philip Tetlock, elite forecasters (or ‘superforecasters’) have two traits in common. First, they update their forecasts more often than other forecasters. Second, they update in smaller increments. His findings have important implications for all long-term investors wanting to sharpen their forecasting skills.
By way of background, Tetlock and his team ran a forecasting tournament where the general public submitted forecasts across a wide range of distinct, time-sensitive events. The tournament identified a group of elite forecasters that were consistently more accurate than the wider population, and upon closer inspection exhibited similar forecasting behaviours which he covers in his book, ‘Superforecasting: The Art and Science of Prediction’.
One shared behaviour of superforecasters is their tendency to update forecasts frequently and by tiny increments – indeed, even changes of a few percentage points had a bearing on overall accuracy compared with those that used rounder numbers.
But what does this mean for investors? Well, many investors consider that companies have a specific intrinsic value, and after conducting extensive analysis may be prone to anchoring themselves to one valuation. This valuation though is a representation of just one future out of many, many potential futures. So when information changes, your assessment of that valuation should also change. And updating your forecasts, even modestly, can improve your performance over time.
You may consider that frequent adjustments are a sign of indecision. Not so. Tetlock notes that superforecasters who adjust frequently improve their accuracy, because they are taking every little bit of information, weighing its importance, and then updating their forecast appropriately.
Put simply, Philip Tetlock states, “A forecaster who doesn’t adjust her views in light of new information won’t capture the value of that information, while a forecaster who is so impressed by the new information that he bases his forecast entirely on it will lose the value of the old information that underpinned his prior forecast. But the forecaster who carefully balances old and new captures the value of both – and puts it into her new forecast. The best way to do that is by updating often but bit by bit.”
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.INVEST WITH MONTGOMERY