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Estimates of the Future

There are three main types of estimates of the future:

A. The Naive
This forecast is based on linear trend extrapolations.

B. The Gullible
This forecast is based on analysts' estimates.

C. The Expert
This prediction is based on rigorous systematic study.

Forecasts, predictions, prophesies, expectations
and anticipations concern the future.
Man has always had an inordinate desire to know the future,
and this is exploited just as fully as any other human passion.

Aristotle (384 -322BC) in his Rhetoric
made a distinction between hortatory statements about the future
and expository statements about the present time.

John Maynard N.Keynes (1883 - 1946) in his Scope and Method
originated the use of the term "positive" to refer to "what is"
and the term "normative" to refer to "what should be."
These terms make the distinction between 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
and 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.

Similarly, statements about efficient and rational markets where all prices
instantly converge to intrinsic value are normative, not positive.
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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