Among the losers in this week’s UK general election were the pollsters and forecasters whose job it is to predict the outcome of which way the country votes. For weeks, the consensus prediction was that we’d end up with a hung parliament, and that a Commons majority was out of the question. How wrong they were.
Nate Silver, the American statistician who shot to fame by using data to accurately predict US elections, declared in his blog on election night that The World May Have A Polling Problem. As it turned out, Silver’s forecasts did point to the Tories just edging the popular vote, but nothing like a majority. It’s interesting to see that the British Polling Council is so perturbed by the fact that all the pollsters underestimated the Conservative lead over Labour that it has set up an investigation to find out why.
While political polling suffers its own unique foibles (such as participants that don’t tell the truth), it’s a reminder why forecasts generally - and particularly in investing - need to be treated with caution. On that note, we could hardly resist a link back to one of James Montier’s great papers, The Seven Sins of Fund Management, the first of which is the Folly of Forecasting. In Montier’s words: “An enormous amount of evidence suggests that we simply can’t forecast. The core root of this inability to forecast seems to lie in the fact that we all seem to be over-optimistic and over-confident.”
On a similar topic, there was an interesting post by Nick Kirrage this week at The Value Perspective, asking Why are analyst ratings and equity prices now going in opposite directions?
You can read Stockopedia’s take on the stocks to prosper on a shock Tory win, here. And you can catch up with the daily reports - and election thoughts - of our small-cap expert Paul Scott here.
Elsewhere this week, we’ve been reading:
Patrick O’Shaughnessy at The Investor’s Field Guide - Tiny Margins for Tiny Companies
Richard Beddard at Interactive Investor - Eight shares for the future
John Kingham, UK Value Investor - 5 High yield FTSE 100 shares with progressive dividends
Josh Brown, The Reformed Broker - The Greatest Trick the Devil Ever Pulled
Jason Zweig in The Wall Street Journal - Bogle vs. Grant in…
