Financial Forecasts: How to Separate Guesswork From Homework

• Remember that even the best fox forecasts are often wrong. If suppositions don't hold, then the forecasts based on them won't either.

• Consider several reasonable forecasts instead of betting the ranch on one.

• Beware of brevity. This is usually a bad sign because behind every solid forecast has a sound framework and a lot of information. If forecasters use too few facts, these facts are more likely to point in the wrong direction. Such forecasts are inclined to see either boom or bust, missing the possibilities in between.

Here are some helpful resources to help you think like a fox: This site was started by William J. O'Neil, successful businessman and all-star investor. O'Neil has taught investors to study the market's current conditions before investing, and stresses having the discipline to change your opinion when the market says you're wrong. Instead of guessing what the market may do, O'Neil reacts to what the market is actually doing.

Economic Cycle Research Institute, the leading predictor of recessions and recoveries. This site includes forecasts and forecasting tools to help you make better decisions.

CXO Advisory Group. Offerings include earnings and economic forecasts and surveys of a wide array of forecasters. It also rates forecasters and gurus on accuracy.

Shadow Government Statistics: Analysis Behind and Beyond Government Economic Reporting . This site shows readers how calculation methods for government statistics may change from year to year and how these changes affect forecasting accuracy.

Becoming aware of the complexities involved will help investors suppress their unhealthy appetite for certainty. By taking forecasts with a grain of salt and recognizing when a forecaster is being a hedgehog, you'll be better able to avoid getting sidetracked and to stick to your investing strategy.

Craig J. Coletta has 20 years of experience in the financial industry. He is president of C.J. Coletta & Co., a Registered Investment Advisor firm, and president of Coletta Investment Research Inc. Coletta is a Chartered Financial Analyst, a Chartered Market Technician and a Certified Hedge Fund Professional. He holds a B.S. in accounting and business administration from Rider University, and is a member of the American Institute of Certified Public Accountants.

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