The business world revolves around a few major concepts or factors which include resources, value adding processes, market place, customers, service, growth, risk to name a few. In turn all of these are tied to one central concept i.e. the market clearing price or simply PRICE or COST depending on your position in the transaction.
Price is the concept which equalizes demand and supply and consequently all business activity whether it is in the brick-and-mortar world or the technology world or any other domain of human endeavor (for that matter including space flights and search for exotic and rare minerals).
Therefore it makes sense for all students of business to have a basic conceptual understanding of how to forecast or prognosticate prices of commonly traded products and services in order to develop future plans.
How can we do that ?
There are various ways of approaching this fundamental business problem.
1. DETERMINE DEMAND AND SUPPLY CURVES
The above encompasses determining and plotting expected demand and supply curves for the product under review. This may be possible by utilizing statistical tools such as regression analysis etc. but will not be practical as accurate economic data is impossible to compile; especially data based on demand impulse generated by the human mind and body, weather, mining discoveries etc.
So this method is out of reach of most of us other than econometric experts.
2. PURE FINANCIAL ANALYSIS BASED ON FUNDAMENTAL ECONOMIC METRICS
We are talking about fundamental analyses which includes DCF, IRR, EVA etc. for companies. This forecasting in itself includes another round of forecasting and making assumptions regarding all raw materials and other costs going 5 years into the future at the least. Furthermore, the same concepts will be very difficult if not impossible to apply to say Crude Oil or any other commodity. You cannot apply DCF to Palladium or can you?
So we are forecasting the price of a company based on our assumptions (read forecasts about future prices of raw material, human resource, interest rates etc.). We are forecasting on the basis of forecasts or in my words squaring unknowns by an equivalent unknown factor…why does that remind me of Donald Rumsfeld…?
3. MODELS BASED ON PAST HUMAN BEHAVIOR REGARDING BUYING AND SELLING AND PRICE HISTORY
That seems complicated. But it is not. Its just a type of technical analysis.
We understand that to forecast prices through mathematical models as mentioned above, we need to forecast a host of other factors and prices and this constitutes an unending chain. Evidence suggests that CAPM, DCF and other models failed to forecast the Great Recession that we are living through. Not because there is something inherently wrong with the logic of the models but because they are themselves dependent on various assumptions about future events and hence try to replicate rational human behavior when we know that humans can also be quite irrational. Tulip mania, World Wars…anyone…
At QAM Research, we believe that we can simplify the whole concept of forecasting, or to use a better term, prognosticating prices through a study of historical prices combined with certain models derived by market observers inductively over the centuries. This body of knowledge is commonly called Technical Analysis but we call it the QAM TRADING TEMPLATES 1.4 as modified and disciplined by our research of 18 years into the subject.
We have no claim to the objectivity of our template based model, but they are based on concepts that are said to model price action or in other words, human behavior and we believe are the most comprehensive way of prognosticating prices of actively traded shares, futures, commodities, currencies etc.
So coming back to the theme of the article, when a business manager is developing the feasibility of a refinery in say the Middle East, he/she needs to forecast crude prices, interest rates, exchange rates over a long term horizon. How is that done? By utilizing one of the methods mentioned above.
To find more about the QAM TRADING TEMPLATES 1.4 , write to us at :
TEMPLATES FOR WINNING TRADERS
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