The year is 1995, A question is poised about the opinions of projections on future cash flow. The following is a response from Mr. Munger and Mr. Buffett. Charlie Munger […]
The year is 1995, A question is poised about the opinions of projections on future cash flow. The following is a response from Mr. Munger and Mr. Buffett.
To the extent that the method of estimating future cash flow requires projections? I would say that projections while they’re logically required by the circumstances on average do more harm than good in America. Most of them are put together by people who have an interest in a particular outcome and the subconscious bias that goes into the process and its apparent precision makes it some dishonorable, foolish or factious what have you. Mark twain used to say a mind is a hole in the ground owned by a liar, and projection prepared in America by anybody with a commission or an executive trying to justify a specific course of action will frequently be a lie. It’s not a deliberate lie in most cases, the man has gotten to believe it himself and that’s the worst kind, projections are to be handled with great care particularly when somebody has an interest in misleading you.
Charlie and I, I think it’s fair to say we’ve never looked at a projection in connection with either a security we’ve bought or a business we’ve bought, we’ve had them offered to us in great quantities, we’ve voluntarily thrown them away when people try to thrust them upon us. The very fact that they’re prepared so meticulously by the people selling the business or the executives presenting to their boards, either we’re wrong or their wrong. It’s a ritual that managers go through to justify doing what they wanted to do in the first place 9 times out of 10. I’ve never met an executive who wanted to buy something that just said well I had to turn it down because the projections didn’t work. There will always be somebody who will come up with a projection to satisfy whomever is signing his paycheck or deal for his commissions and they’ll pass it along to whomever else they need, the bankers, the board, whoever they need. It is total nonsense, I was recently involved in a situation where projections were apart of the presentation and I asked that the record of the people who made the projections their past projections also be present at the same time. It was a very rude act.
It was regarded as apostasy.
Well it proved the point, it was a joke.