Investment forecasting doesn’t always go according to plan

PUBLISHED: 15:40 16 October 2020 | UPDATED: 15:41 16 October 2020

Decca famously rejected the Beatles, telling them that guitar music was on the way out, says Peter Sharkey - so not all forecasts can be taken as gospel. Picture: Neil Martin/Unsplash

Decca famously rejected the Beatles, telling them that guitar music was on the way out, says Peter Sharkey - so not all forecasts can be taken as gospel. Picture: Neil Martin/Unsplash

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Decca famously rejected The Beatles, says finance expert Peter Sharkey, as he looks at some famous mis-calculations...

Any idea what’s going to happen to global stock markets over the next 12-18 months? Me neither. However, before you commence a search for suitably soothing words of corporate wisdom or intelligent-sounding forecasting, you may wish to consider the following (true) stories.

Back in 1962, an unassumingly named student, Fred Smith, was studying economics at Yale University. Fred had big ideas, one of which he outlined in an essay which discussed the commercial merits of creating a reliable, worldwide overnight package delivery service. Remember: this was almost 60 years ago.

Fred submitted the paper to his economics professor, hoping for academic endorsement of his radical concept. Instead, the professor’s comments at the foot of the hand-written essay came as an unexpected blow: “The concept is interesting and well-formed,” wrote the prof, “but in order to earn better than a ‘C’, the idea must be feasible.”

Nine years later, Smith founded his package delivery business, admittedly with a $4 million inheritance plus $80 million of loan and equity funding, although things did not go swimmingly, at least in the early days. Fred’s company came so close to bankruptcy that in desperation he literally took a gamble, flying to Las Vegas where he played Blackjack with the firm’s remaining $5,000, turning it into $27,000 over a single weekend.

Vegas success gave him much-needed breathing space and by 1976 the company made its first profit (of $3.6 million). Smith was en route to creating a hugely successful overnight package delivery business, eventually building an empire valued at almost $35 billion. The name of the business? FedEx.

Read any compilation of business setbacks and it becomes immediately clear that one person’s negative prediction is another’s motivation.

In 1959, for example, Xerox, a company founded in 1902, approached IBM to discuss the possibility of a joint venture arrangement which Xerox believed was capable of dominating the embryonic photocopying industry.

IBM were dismissive and wrote to Xerox after their meeting saying that: “The world potential market for copying machines is 5,000, at most.”

The same year, Xerox launched its first plain paper photocopier and within five years was generating revenues of $ 500 million. Today, Xerox is worth $4.3 billion and enjoys revenues of $10.6 billion.

There are many more, of course: Decca famously rejecting the Beatles, telling them that guitar music was on the way out; an anonymous publishing executive advising JK Rowling that children were not interested in witches and wizards any longer. On and on these corporate forecasts go, although it’s not unusual for them to be wildly inaccurate.

If, therefore, we assume that all companies would prefer, to use the government’s latest phrase, ‘build back better’, we must ask whether such an ambition is practicable in the short or medium term. Western economies have taken such a battering that adopting ‘build back better’ as a bona fide growth strategy may become a commercial impossibility.

Is it better, whenever the rebuilding process eventually begins, for companies to stick, initially at least, to what they know?

Talk of a radical, new way of life might be a tad premature. Sure, electric cars, permanent home working, the conversion of office space to city centre apartments, offshore wind farms and the wholesale adoption of solar power sound terrific, but they could represent a much greater commercial risk than the tried and tested.

Which brings us to BP, the struggling oil giant. Twelve months ago, BP published its annual energy outlook in which it predicted that all major sources of energy, including oil and coal, would continue to expand to meet global demand. Last month, however, BP’s latest outlook took a completely different view: oil demand, it asserted, had peaked, while demand for liquid fuel would never recover from the pandemic. In fairness, these predictions were accompanied by a raft of caveats, although one prospective scenario suggests that demand for oil will fall by more than half within 30 years; demand for coal, according to the same model, will fall by 85%.

The experience of Fred Smith, Xerox, the Beatles and JK Rowling remind us of just how wrong some predictions can be.

BP appears intent on becoming a renewable energy business, but the process could take several decades. In the relative short term, as the world’s economies fire back up, demand for oil could surge as manufacturing output and trade return to pre-pandemic levels. If so, the effect on BP’s share price, which has fallen by more than 57% over the past 12 months, could also benefit and enjoy a much-needed Fred Smith effect.

Your retirement planning may involve equity release, but how much could you release from your home? The figure is determined primarily by your age, health and your property’s value, which must be at least £70,000. These are the principle requirements, although alternative options exist based upon personal circumstances. You can get a very good idea of how much equity you can release by visiting the Moneymapp.com website and filling out the equity release calculator.

It’s worth noting that equity release isn’t a panacea. It’s not suitable for everyone and it may compromise your eligibility for means-tested state benefits.

As many readers have already discovered, there’s a wealth of information to be discovered at: www.moneymapp.com/equity-release . In addition, there are hundreds of blogs and articles dealing with the subject on the Moneymapp website, including Peter Sharkey’s weekly blog, rated among the UK’s very best. Read more at: www.moneymapp.com/blog

You may still email any queries or questions regarding equity release to: enquiries@moneymapp.com

Please note that Moneymapp.com cannot advise readers on whether equity release is suitable for them. However, Moneymapp.com can introduce readers to professional advisers who will explain the process and its implications for your estate and entitlement to means-tested state benefits.

ONLINE

When do you want to start enjoying life?

Read Peter Sharkey’s latest blog exclusively at www.moneymapp.com/blog

For more financial advice, check out Peter Sharkey’s regular column, The Week In Numbers.


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