Best Guesses

We aim to produce the most intensively researched predictions, but still hesitate to call them anything more than a Best Guess

Econometric Forecasts   |  Buy & Sell Signals   |  Valuation Ratios   |  Investment Odds   |  Action Recommendations

Bottom-Up Optimistic Bias

Broker's recommendations are seldom negative

Different Kinds of Opinion

The various types of charts and ratios in the RouteMaps contain unambiguous opinions, generated automatically and objectively using active quantitative top-down forecasting techniques. This helps to overcome the optimistic bias of aggregating bottom-up analysis.

There is one logical exception, described below. Nevertheless we hesitate to call our results anything more than "Best Guesses" in the world of investment, where to be on the right side of average, more often than not, already represents outperformance. Our Best Guesses should be seen as approximations of the general direction and timing, based on projecting past patterns of behaviour. Users should be aware of the strengths and weaknesses of each type of analysis. Depending on the type of analysis, our Best Guess may take a variety of forms.

  • Econometric Forecasts
  • Buy & Sell Signals
  • Valuation Ratios
  • Investment Odds
  • Action Recommendations

 

Our Composite Trend Indicator shows the exponential improvement in investment performance by combining Buy or Sell signals generated by the different market timing strategies for which results can be back tested.

  • Economic Trends
  • Chart Technical Performance
  • Seasonal Trading Patterns

Econometric Forecasts

Forecasts are shown as oragne lines

Econometric Forecasts

These are shown as an orange projection in the chart alongside. They are only as good as our econometric models and the raw data fed into them. Top-down economic forecasts are often more reliable than aggregating bottom-up company forecasts because of the well-established tendency of the latter to be biased towards optimism.

  • During the last decade a survey of aggregated bottom-up earnings estimates proved to be a staggering 8% too optimistic in predicting growth every year (GS Global Economics Papers No. 62, May 2001). 

  • Similarly a survey of nearly 28,000 US analysts' recommendations by First Call / Thomson Financial in May 2001 showed that nearly 70% were Buys while less than 1% were Sells, as shown alongside. 

Nevertheless directly or indirectly top-down analysis is based on consensus estimates for the most widely analysed economic variables. While these lack the optimistic bias of bottom-up estimates, they do have a tendency to lag turning points in the real world.

Investing Signals

Buy & Sell signals are shown as red arrows

Buy & Sell Signals

These are shown as red arrows alongside and are appropriate for strategies based on trends, derived from past patterns of market behaviour. They are based on applying the same mathematical formula across all countries. These have been tested as extensively as possible to minimise the risk of bias.  We have used data on 50 countries and regions over 25 years, which covers a wide range of circumstances. Furthermore the assets in question are so large as to make market manipulation difficult. While the results of the strategies we show in the Track Record are often very good, there are two important caveats. Firstly, not all strategies worked in all markets all the time. Please check the Reliability figures in each table. Secondly, cynics believe that successful strategies tend to become self-defeating in time as more and more players adopt them. On retesting our data for just the last four years, some modest deterioration was found, but it was not widespread or significant enough to warrant changing any strategy. In any event there is little statistical reason to prefer a subset over an entire database.

Valuation Strategies

Valuation ratios are shown as oscillators

Valuation Ratios

These are shown as a secondary yellow chart series, using the left hand vertical axis, and coloured yellow ( and a green series if there is a second ratio) in the chart alongside. This variety of Best Guess is appropriate in the case of value investing strategies, where it is possible to identify what is cheap or dear, but not the timing of any change.

Owing to conceptual difficulties in defining in advance the upper and lower limits of valuation ranges, it is not meaningful to define buy and sell zones. Interpretation of such charts therefore also requires reference to ranking tables, in which markets are ranked by the divergence of the current ratio from its historical average. For example in the chart, the price index may have reached a peak but, as the valuation ratio is only in the middle of its trading range, there remains considerable further upside potential.

 

Odds of beating Cash during the great bull market 1973-1999

       
  By Country (1973/1998)  
       
  Long Term Bonds  
  Liquidity 67%  
  Momentum 100%  
  Seasonal 93%  
       
  Foreign Currencies  
  Liquidity 45%  
  Momentum 68%  
  Seasonal 71%  
       
  Stock Markets  
  Liquidity 79%  
  Momentum 85%  
  Seasonal 77%  
       
  Styles & Sectors  
  Liquidity -  
  Momentum 100%  
  Seasonal 60%  
       

Investing Odds

These are used in seasonal trading strategies where other types of prediction are meaningless. These are calculated on the basis of doing better than break-even, assuming no dealing expenses. By definition there will always be a profit between the annual high and low, even if the same months are chosen every year, so it is more relevant to check for reliability in order to minimise the risk that exceptional movements in one year may create misleading results. In order to minimise this risk as much as 25 years of data is used.  To highlight exceptional data, shorter term results are also shown. The darker the colour of the series the longer the time span used. Thus the white series covers 4 years, the light grey series covers 12 years and the dark grey series covers 25 years.

The table alongside shows the odds of success for the complete set of positions taken in each market. However please note that the odds for success in any one month will be much lower and generally range from 55% to 60%.

Action Recommendations

Our overall Best Guess about each market is the end product of up many different strategies for each asset class. First different types of investment sentiment, trend and valuation signals are combined into separate categories. Then these three categories are combined together.

 

Please check the financial health warning
Warning

Financial Health Warning

Regardless of preferred method of prediction, users of any quantitative technique should be aware of the risk of counting only what can be counted. A Chronology chart is provided to analyse the influence of special factors, such as elections and wars in each market's financial history.  This provides no predictions but will enable users to asses the effect of similar events in the past or in other countries.

Even after minimising the risks by providing a variety of quantitative investment tools, Investors RouteMap makes no claim to incorporate all relevant factors. Its objective is to improve the investment odds by assessing those factors likely to be most important and capable of being analysed consistently over as many countries as possible.