Security Analysis - Projected Revenue or Past Earnings?

Benjamin Graham — and his student Warren Buffett — on the unreliability of earnings forecasts and projections in finance.

Benjamin Graham

Graham wrote extensively about the unreliability of estimates in finance.

The Intelligent Investor

"Because the experts frequently go astray in such forecasts, it is theoretically possible for an investor to benefit greatly by making correct predictions when Wall Street as a whole is making incorrect ones. But that is only theoretical. How many enterprising investors could count on having the acumen or prophetic gift to beat the professional analysts at their favorite game of estimating long-term future earnings?"
Benjamin Graham, Chapter 1: Investment versus Speculation, The Intelligent Investor.
"The more dependent the valuation becomes on anticipations of the future—and the less it is tied to a figure demonstrated by past performance—the more vulnerable it becomes to possible miscalculation and serious error... It appears to be almost impossible to distinguish in advance between those individual forecasts which can be relied upon and those which are subject to a large chance of error."
Benjamin Graham, Chapter 11: Security Analysis for the Lay Investor, The Intelligent Investor.

And then, a few chapters later:

"From the first we wanted to make sure that we were getting ample value for our money in concrete, demonstrable terms. We were not willing to accept the prospects and promises of the future as compensation for a lack of sufficient value in hand."
Benjamin Graham, Chapter 14: Stock Selection for the Defensive Investor, The Intelligent Investor.

Security Analysis

"Analysis is concerned primarily with values which are supported by the facts and not with those which depend largely upon expectations."
Benjamin Graham, Chapter 2: Fundamental Elements In The Problem Of Analysis. Quantitative And Qualitative Factors; Security Analysis.

Also, from the Preface to the first edition of Security Analysis:

"Some matters of vital significance, e.g., the determination of the future prospects of an enterprise, have received little space, because little of definite value can be said on the subject."
Benjamin Graham, Preface: Security Analysis.

Warren Buffett

Buffett too disparages the idea of making investment decisions based on forecasts and projections.

"If you have a business that fits the following criteria, call me or, preferably, write... (2) demonstrated consistent earning power (future projections are of little interest to us, nor are "turnaround" situations)."

Graham's actual stock selection framework thus only uses objective figures from the past - including checks for past growth rates - and requires no assumptions about the future.

Graham Resources