The Devil Is Not in the Details - Views on News from Equitymaster

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The Equitymaster Research Digest

The Devil Is Not in the Details
Mar 10, 2017

The big whiteboard in the research section of our office does not have financial numbers scribbled on it for a change.

It has my team's forecasts for the number of seats BJP will win in the UP-state elections.

Will they get it right come 11 March? We will know soon enough. Their prediction, though, is impressively close to what the exit polls are saying, around 190.

While our exercise was in jest, even the most sophisticated of these predictions should be taken with a pinch of salt. After all, exit polls have been horribly wrong many times in the past.

Arguably, the most high-profile example is Nate Silver in the most recent US presidential elections. The Sultan of Stats struck gold when he correctly predicted 49 of the 50 states in the 2008 US presidential elections.

And then came the Trump blunder...

Proving that models still have a long way to go, the math wizard got it horribly wrong as Hillary Clinton, who he gave a 95% chance of winning, lost the presidential race to Donald Trump.

What about financial predictions?

If you think the modeling we financial analysts do is more scientific or accurate, you are dead wrong.

Some of the stock price and earnings predictions from financial models have gone as horribly wrong as Mr Silver's electoral predictions.

And unfortunately, instead of making it simple, most of the analyst community has gone the other way and made financial modeling more and more complex. It is not uncommon to see the financial model of a company run dozens of pages with hundreds of cells on each page.

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