Warren Buffett thinks projections are useless | Hacker News Reader

Warren Buffett thinks projections are useless

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23 pointseoghan3 comments

I fully agree projection figures are guesses, likely to show the situation in a good light, and as much use as a guide to the future as a random line drawn on a bit of paper.

BUT

that is not all that makes up a projection. The interesting and useful information is what assumptions have gone into making the projections, what understanding of the market is present etc. etc. By questioning the creator of the business plans about all of this you can rapidly find out if they understand their business, their market place and their competition.

(I'm not sure how this scales - but for small companies it's critical information. However it certainly works in some situations - IDC are projecting that Microsoft and Nokia will once again be a dominant force in mobile phones, reading the article their assumption seems to be that, Microsoft and Nokia have been dominant in the past and therefore, despite a changing market and any damage they have seemingly done to their own companies, they will be again. Having identified it I can now evaluate that assumption on it's own merits. With a small company this may well be more hidden. Another great example comes to mind: the work song nano cluster episode of Big Bang Theory when Sheldon points out that Penny's business plan will result in her earning considerably less than minimum wage)

Projections are not useless - they tell you what people are thinking and how well they understand key things needed to make it succeed. Just don't treat them as actual predictions of the future.

Projections based on pure guesses are useless as information, but useful as a clue to the insights of the entrepreneur. However, projections based on real hard data, beta test growth, virality, those things can be valuable. It all depends on how the entrepreneur arrived at the conclusions.

Buffett's point is that a projection prepared by a person wishing to sell his business, no matter what data went into the projection, will be inherently biased and is to be treated with skepticism. Buffett would much rather see said data himself. If he can understand it and the business, he'll make his own projections. If he can't, he certainly won't rely on the person with an interest in making the projection look good.

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