Stock Markets and
Estimates of the Future

In stock markets 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, and

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 - 322 BC) 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 very useful methodological function.