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, 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.
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