Forecasting is a skill that is valued the world over. From being able to accurately forecast case by case sales at a small pharmaceutical company, to analysts who are paid to study and forecast world events, forecasting skill can make or break important results. Often times world class investors are keen forecasters – sometimes on the macro level, like George Soros, or down to the micro level, like Warren Buffet or Ben Graham. Our question here comes at forecasting and investing from the other direction, “can people who are shown to be excellent forecasters also drive outstanding investment results?”
FROM SUPERFORECASTING TO INVESTING – AN EXPERIMENT
Brett Specter-President, Brier Fund, LLP
From 2011-2015 I participated as a forecaster on the Good Judgement Project team that was the winner of an Intelligence Advanced Research Project (IARPA) tournament. The purpose of the tournament was to help the intelligence community develop better methods for anticipating global events.
By the second year of the tournament it was observed that a small group of forecasters, out of the 2,000+ taking part on the GJP team, were consistently more accurate in their predictions than other forecasters. These forecasters, dubbed “superforecasters” were placed on teams of around 15 participants so they could collaborate. Despite having little or no expertize in the areas they were forecasting on, these super teams “outstripped the accuracy of several of the world’s intelligence services” (1). They accomplished this with no access to classified data.
If you are interested in learning more about the Good Judgement Project, superforecasters and forecasting in general, I would recommend reading Phillip Tetlock’s book “Superforecasting: The Art and Science of Prediction”. I would also recommend testing one’s forecasting skills on the GJ Open platform: http://goodjudgment.com/superforecasting/index.php/category/gj-open/
The Investing Spark:
A few months after the tournament concluded, I was listening to a BBC interview of Phil Tetlock where the interviewer made the comment, paraphrasing, “These superforecasters must be very wealthy because if they know what’s going to happen in advance, they can use that information to their advantage in the markets.” My immediate thought was, “That’s certainly a theory worth testing!” I shared this idea with other Supers and after a period of organizational and broker research, a number of us formed a Limited Liability Partnership which functions as our Investment Club.
One of our club’s advisors, Walter W. (who is also a superforecaster) introduced us to Erik’s book and the IntelligentOptionInvestor.com. In the Fall of 2016, we began talking with Team IOI about an arrangement where IOI would help us with valuation and investment structuring education, as most of Club members are not experienced investors. That has progressed to an experimental process that we have agreed on together.
Our Experiment:
In an animated book review of “Superforecasters” by Practical Psychology, the main qualities of a good forecaster are described as, “being humble, cautious, open minded, welcoming to new facts, having a growth mind set and grit.” (2). On the face of it, these qualities should also lend themselves to being a good investor. That is, to focus on finding knowable facts even if they contradict what were previously held assumptions and to acknowledge there are plenty of unknowable facts about a company or a market in addition to a lot of noise and hype that may have nothing to do with the actual value of what one is considering investing in.
An additional challenge for our club is while we may be correct in predicting if and when an event will occur, we must also predict what effect that will have on a stock or market. Our hope was that options’ flexibility would allow us to take the fullest advantage of our probabilistic assessment of possible outcomes and invest accordingly.
In order to bound our experiment, we have chosen to look at opportunities that have some “value” to them. These can be situations like mergers and acquisitions, spinoffs or bankruptcies – “special situations” in investing jargon. These events are well suited to our forecasting skills. The boundaries of the forecasting questions are time limited and have clear outcomes. IOI’s valuation and investment structuring expertise in combination with our own forecasting expertise looks like a winning formula to us. Our vision is to also experiment with less structured subjects, like the impacts of geopolitical events (elections, referendums, etc.) and other situations that have clear, discreet outcomes.
Collaboration:
My personal experience confirms that while I was a good forecaster on my own, I became a far better one once placed on a team. Our club members have backgrounds in a variety of professions in addition to being multinational. This is helpful in terms of the diversity of views they bring to the forecasts and in the ability to spot investment opportunities in more than one country. Very few of us have had experience as professional traders, however. We are therefore grateful that IOI has chosen to help with our education in valuations and on the mechanics of investment structures that use options. We, in turn, hope that sharing our forecasts with IOI will expose investment opportunities that may have been previously unseen.
- http://www.npr.org/sections/parallels/2014/04/02/297839429/-so-you-think-youre-smarter-than-a-cia-agent
- https://www.youtube.com/watch?v=rV5Gicb66WA
Brett Specter attained Superforecaster status during the 4 year tournament on the Good Judgment Project team. He continues to forecast professionally for Good Judgment Inc., the commercial spin-off of that project. He is President of Brier Fund LLP, an investment club whose members are comprised of former Superforecasters.