Photo: Flickr user David Shankbone.
"The foreseeable future" is a popular concept in investing circles. Here at The Motley Fool, we've used that expression more than 850 times in 2015 alone. At The Wall Street Journal, the phrase pops up about twice a day. Press releases and SEC filings mention it all the time, and executives have talked about this concept in thousands of earnings calls or presentations.
But what does it mean? How should an investor interpret this vague phrase? Is your idea of "the foreseeable future" always the same as mine, or Warren Buffett's, or even that of the market-steering Securities and Exchange Commission itself?
Let's find out.
The basics
According to Merriam-Webster's dictionary, the foreseeable future means "lying within the range for which forecasts are possible." Cambridge Dictionaries calls it "as far into the future as you can imagine or plan for."
On a simple, intuitive level, that's often good enough. If sales will increase for the foreseeable future, you should expect growth until something changes. By definition, we're talking about a smooth ride to the far horizon, assuming that everything stays the same.
But it isn't always all you need to know. For example, what's "foreseeable" to a CEO or chairman of a public company is often beyond the predictive reach of private investors like you or me. They have lots of information we don't, as well as specialized systems and staff that can dig up even more data as needed.
For example, how many iPads did Apple ship to China in July? I have no idea, and neither do you. But I bet Tim Cook has a firm grasp of that important data point. Therefore his view of Chinese iPad sales for the foreseeable future stretches further out than ours and should also be more accurate. Cook knows more about the trends at play here, so on this particular topic, his future is more foreseeable.
Berkshire Hathaway Chairman Warren Buffett.
Even Buffett's "foreseeable future" doesn't last forever
The more sophisticated the investor, analyst, or business leader, the less you'll see them thinking in loose, nebulous terms. Take Buffett, for example. Every year, he writes a long and detailed letter to investors, outlining how his Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) is doing, how it fits into the broader economy, and what's coming up ahead. These letters are veritable goldmines for serious investors, who plumb them for insights into how the world's finest investing mind works.
Between 1977 and 2014, Buffett mentioned "the foreseeable future" exactly once.
In 1980, Buffett noted that the reinsurance market is prone to "amateur night," as low barriers to entry and hefty up-front insurance fees can inspire insurance companies to take needless risks. Then, the next major disaster brings down the whole house of cards. Eager to avoid that trap, Buffett pledged to keep Berkshire's reinsurance activities limited "for the foreseeable future."
Five years later, Berkshire hired reinsurance wizard Ajit Jain, who pushed the company deeper into high-risk bets with ever-rising insurance premiums. Today, Jain is seen as a rainmaker and potential heir to the Berkshire throne. In other words, in 1980, Buffett's "foreseeable future" didn't stretch much farther than five years, and that's in a market he always knew like the back of his hand.
Whether it's a conscious choice or not, Buffett has been avoiding that nebulous term ever since. Instead, he prefers setting solid time frames for every forward-looking prediction, such as "the next five years" or "the next decade."
That way, he can always look back at older forecasts to see how close he actually got -- and investors can do the same. In the 1992 letter, for example, he was "virtually certain that the return over the next decade from an investment in the S&P index will be far less than that of the past decade."
History proved him right. From the start of 1982 to the end of 1991, the S&P 500 returned a total of 240%. The next decade, the index slowed down to a 175% return. Berkshire shares edged out the broader market's return in the earlier period and absolutely crushed it over the next decade. I'm not saying that setting a definite time period helped Buffett beat the market or predict its swings, but that clarity and precision sure helps him judge which predictions worked and which ones failed.
Your own "foreseeable future"
Setting strict timetables can help us regular investors, too. If you actually write down your investment thesis for every stock you own, with some solid target figures thrown in for good measure, you'll have a basis for deciding whether, and when, to sell those big winners.
And sometimes you simply must come up with time-limited predictions. Discounted cash-flow models can help you find a realistic market value for most stocks, for example. It's a time-honored tool for serious value-seekers. But it only works when you're feeding the model with realistic expectations.
Let's think about a fairly simple three-stage DCF calculation. You have to set appropriate short-term growth rates for your target stock, followed by a realistic midterm slowdown and sufficiently conservative long-term targets. All of these figures must be balanced against a reasonable discount rate.
You see the plethora of vague assumptions we're making here? There are four distinct opportunities to set the wrong target, thus arriving at the wrong result.
By plugging in different -- but eminently reasonable -- growth rates for a well-known stock like Apple, I could find that the stock is either 45% too expensive today or perhaps 54% too cheap.
Setting careful parameters is crucial to reaching a usable result here. If you can put your finger on the five-year or decade-long business trajectory ahead, it'll help tremendously. Without some idea of which growth rates to use, discounted cash flows are useless. So it helps to have a solid idea of what you mean by "the foreseeable future."
It doesn't have to be exactly the same thing that Warren Buffet or Tim Cook is thinking about. What matters is how far ahead you can see through the fog of Wall Street war, with some margin of error for the occasional unpredictable pitfall or catapult.
The SEC actually has rules regarding forecasts, but unfortunately, they aren't very precise. When making statements about the foreseeable future in official filings and other public disclosures, it's up to management to maintain its own definition, which is "reasonable under the circumstances." The circumstances will change from company to company, from document to document, and sometimes more often than that -- and it's up to the company to keep us informed of what it all means.
When confronted with these nebulous statements, it's best to think in much shorter terms than "forever" or "until retirement." All good things must end -- as must all bad things.
My crystal ball always seems to be in for repairs. Yours is probably no different. Even the giants of industry have to judge the future in fairly short increments.
The "foreseeable future" is shorter than you think. Invest accordingly.
