Superforecasting and fine margins

One of my favourite sayings is that there are three degrees of learning and three types of people who exhibit them:

Those who don’t learn from their own mistakes. We all know some of these people
Those who do learn from their own mistakes. We hope that our children are in this category at least
Those who learn from other people’s mistakes

Of course, it’s the last category that we should all aspire to be in and we’d all like to think that’s where we are.

But there’s a lot of other people in the World and there’s an awful lot of mistakes that they have collectively made. If we were to spend our lives analysing the actions of all those people we’d be paralysed. Sometimes, we just have to take on board as much data as we can, then jump and hope.

I’ve been reading the book Superforecasting: The art and science of prediction recently and applying it to the decisions that we have to make at A4G and the advice we are giving to clients.

So-called “Super-forecasters” are a select group of people with a special skill for predicting the future more accurately than the rest of us. I won’t try and paraphrase the book but there are a few lessons in there which we can all apply to our business life:

Super-forecasters take on board a lot more data before making their predictions
Super-forecasters think in terms of likely percentages whereas most people are handicapped by only thinking in three terms: certain to happen, certain to not happen, 50:50

Super-forecasters are unemotional about recent events and never over-react

In the week that our Prime Minister announced a whole raft of new restrictions, the debate between socially distanced friends in pubs is whether this so-called second wave was entirely predictable or not.

I’ve had one or two debates with friends and clients about how the pandemic has been handled. One of the main comments made, is that it’s easy to be wise with the benefit of hindsight. Of course, I completely agree with that.

The great thing about hindsight is that it demonstrates the consequences of actions or inactions. There are no confusing possibility / probability equations to consider. You can look at the end result and justify that the actions or inactions of one person were the cause of that event.

Newspapers, opposition politicians and keyboard warriors are the masters of this. They are quick to point the finger of blame.

But if you are the person being pointed at, then you can always fall back on the line “well it’s easy to say that in hindsight isn’t it?”

The argument will rage back and forth with no conclusion.

But Super-forecasters don’t think like that.

They are only interested in hindsight to the extent that it may change the way they would approach a similar situation going forward.

Super-forecasters are only really interested in foresight. And probability.

Because what Super-forecasters know is that nothing in life is certain. Even the sun rising tomorrow morning is not guaranteed. A giant meteor driven off course by forces undetected by any astronomer could crash into the earth overnight and stop it revolving on its axis (or something equally unimaginable to all of us). Of course, the likelihood of the sun rising tomorrow is 99.9999999 (keep going) 999% and so close to certain as to not be worth consideration.

But other decisions are not so obvious.

As I write this article on Wednesday, I took a look at the BBC weather forecast. It is suggesting that in one hour’s time, there is a 97% chance of rain. Almost certain in other words. On Saturday morning it is predicting only a 1% chance of rain.

But if I look forward a couple of weeks, the forecast is suggesting 20% chance of rain almost every hour of every day. That’s not particularly helpful.

The reason for that level of uncertainty is that it’s too far off to accurately predict. There are so many variables in there that its almost impossible to forecast and that percentage is probably mainly based on the likely weather at this time of year.

But as business owners, we have to make forecasts of the economic conditions in our industry, how it will be affected by the Pandemic for six maybe nine months ahead. And if we’re thinking of signing an expensive lease on a property, maybe 5 years ahead! We have to make purchasing, employment and investment decisions now based on our predictions. In our own fields, we have to try to be Super-forecasters.

I like to think I did a bit of superforecasting myself back in February and March. In a meeting on February 24^th, I urged caution to a client who was thinking about taking on one of those expensive leases on an office in London. He told me recently he thought I was mad when I raised the possible impact of Coronavirus. As a result, he held back and is mightily relieved he did.

But I was already becoming a bit of a geek by then about this stuff. I’d pretty much thought of it as a news story when it was only in China. When it reached Italy, I became slightly obsessed. The information was all out there if you just read reputable sources and ignored social media (easy to do for me as I’m not on it!).

By staying up to date, reading widely, and doing the maths when necessary, it wasn’t that hard to predict a few weeks ahead. Most of the information from the boffins in March has proved to pretty much spot on as well.

But just because I’m good at forecasting the economic impact of Coronavirus, doesn’t make me a good forecaster at other things. Most of the shares I’ve bought in the past 5 years based on what I thought was a good strategy have performed worse than if I’d stuck a pin in a list of the Footsie250.

The reason?

Lack of research. I don’t have the time to research companies I might buy a few shares in. Or maybe I’m just not interested enough.

But plenty of other people do and are. Therefore, they win, I lose.

I’m also not particularly good at forecasting the results of my football team either.

This is not through lack of research. I read anything and everything about my particular team.

But my knowledge is undermined by emotion. When we’ve lost a couple of consecutive games, I am so gloomy I think we are going to lose to anyone and everyone. When we’ve won a few games, I think we are unbeatable.

But I’ve become pretty good at predicting the fortunes of my Dad’s team since he passed away. I’m interested enough to follow what they are up to but not as emotionally invested.

Brentford football club are also an amazing model that every small business could learn from.

Historically they have bumped around the 3^rd and 4^th tier of English football and are dwarfed by 3 local clubs with bigger grounds and more resources. But they have punched well above their weight for almost 12 years now and slowly climbed up the leagues until they came within one win of making it to the Premier League.

How they have done it is fascinating.

The owner is a man called Matthew Benham who made all his money from an online gambling company and fulfilled a childhood dream by buying the club he has always supported.

Nothing unusual there. There are lots of people that do this. But most fall foul of the nest of vipers that is the football industry. The old saying for football club owners is that if you want to come out of it with a small fortune, you better start with a big one.

Brentford’s approach is often compared to the strategy used by the Oakland A’s baseball team and featured in the book Moneyball which was made into a movie starring Brad Pitt. The philosophy is based on identifying people who are undervalued by the rest of the world. Brentford have moneyball’d their way up through the leagues, bringing in players who have over-performed at unfashionable clubs, giving them a chance and then in many cases selling them on at a profit to richer sides.

They recently sold their star striker Ollie Watkins to Aston Villa for £33m. He cost them £1.8m in 2017!

Brentford’s fans get how this works. In other clubs there would be uproar, but the fans understand that their chairman and manager will have someone else waiting in the wings.

And as for their managers, well they have a habit of promoting from within.

And they never get carried away and over-react to results. When they suffered a run of only one win in the first 10 games under their current manager, Thomas Frank, they famously analysed the underlying statistics and concluded that the right things were being done and that results would soon turn round. And they did.

Basically, the management team act like classic Super-forecasters.

But this is not a big secret. I’m writing about what they do in a Friday night email for goodness sake.

So why don’t all the teams do the same?

Well many are trying to but with mixed results. No-one seems to be punching as far above their natural level as little Brentford. Why? Maybe the other teams are not as thorough in their research. Maybe they succumb to fan pressure for instant results too easily.

Of course, all football clubs have a natural ceiling. Customers don’t come and go as they do for other businesses. It would take a hundred years of success to build up a support base to be able to compete with the really big teams.

But there are no natural ceilings for your business.

In the next two years, foundations will be laid for hugely successful companies. Smart owner-managers will analyse the data, predict market trends, recruit under-appreciated talent, take market share from competitors and become big players in brand new industries emerging from the Pandemic.

So why can’t that be you?

After all, your competitors don’t have the resources that Brentford’s competitors do. It doesn’t take huge amounts of research to develop perceptive powers about the future in your particular market. Whatever you do for a living, I’m sure you can recall something happening which you knew was entirely predictable. Now you’ve got to take that knowledge, update it for the current situation, weigh up the probabilities and take action.

If you need someone objective and unemotional to bounce your plan off, well you know where we are.

If you need to get an expert analysis of the general economic direction the UK is heading in, book a place at our webinar with the Bank of England on 13^th November before places run out.

Next week I’ll be explaining the difference between Blackbox and Whitewash thinking.

Have a good weekend.