Charles Brandes’ forecast follies

Holding a roast for forecasters did not formally appear as an item in the program for this week’s meeting of the Toronto CFA Society, but members got precisely that from Charles Brandes, president of San Diego, Calif.-based Brandes Investment Partners.

Speaking at the CFA Society’s annual forecast dinner, Brandes set the tone — or perhaps temporarily changed the tune — by announcing that he would not bill himself as a forecaster. “I’m pretty much of an anti-forecaster,” he quipped. He then said that much of his material would amount to quotes from other thinkers and that he considered himself blameless for their pronouncements on forecasting.

“You can blame those other people for all of these things that I’m going to say tonight. I am totally innocent,” he said, evoking light laughter from the audience. He then billed his material as “The Forecast Follies.”

Perhaps to suggest that forecasts can be used to underpin any argument, Brandes offered the time-worn quote: “There are three basic kinds of lies … lies, damn lies and statistics,” a maxim that he attributed to former British Prime Minister Benjamin Disraeli, but one that is also often attributed to Mark Twain.

Brandes also quoted author Lewis Carroll: “If you want to inspire confidence in forecasts, give plenty of statistics, irrespective of whether they are accurate or intelligible,” Carroll once said.

Brandes then turned to what appeared to be the real message wrapped in his tongue-in-cheek humour: the continued validity of value investing. This would not seem surprising, since he has consistently billed himself as a believer in this approach, which is outlined in Benjamin Graham’s 1949 book, The Intelligent Investor.

Brandes echoed Graham’s thesis on the difference between investment and speculation, arguing that today’s volume of available investment information sometimes means investors become confused about the difference between investment and speculation. He continued discussing Graham’s ideas by stressing repeatedly that short-term thinking is not investing but speculation.

Investing — in the Brandes-Graham lexicon — means staking dollars on the value of a specific company and its business, cash flows, and increases and decreases in profit over a long period of time. Decisions based on forecasting currencies, interest rates and quarterly revenues amount to speculation instead of true investing, he said. “Anybody who is concerned about what currencies or interest rates are going to do over the next couple of months [should] never should use the term investor, [but should] use the term speculator,” he maintained.

Brandes’ urgings, while valid, point to a kind of “easier-said-than-done” fiduciary dilemma for advisors, suggests Robert Fleischacker, president of Markham,Ont.-based Stonehaven Financial Group. Individuals are often not willing to wait for long-term returns, he says. “All the noise out there, everything we get from the manufacturers and from the markets, from the media, is focused on tomorrow.” It’s the advisor’s role to manage client expectations and set realistic investment horizons, while ensuring clients are investors and not speculators, he says.

Behind the roasting and the chuckles, Brandes’ emphasis on value investing remains the same as when he first set up the company in 1974.

Al Emid is a Toronto-based freelance financial writer.

(10/06/06)