We’re living in a time of exponential change. It started decades ago with the introduction of the personal computer and the internet, and it’s continuing with newer technologies like cloud computing, electric cars, and artificial intelligence. However, forecasters are still largely thinking in a linear fashion, especially on Wall Street. The natural tendency is to look at recent history and extrapolate what’s currently happening into the future. It’s the safe play because those that attempt to think exponentially are often ridiculed or even dubbed frauds. Linear forecasts get a pass, even if they prove less accurate.

During this time of exponential change, we think a heavy dose of humility can serve your investments well. No one knows what the future holds, but keeping an open mind and recognizing that rapid change is afoot can be a great start for considering the possibilities of what’s to come. A great example of this is what’s happened in the solar industry.

This chart fascinated us for two reasons. The obvious one is how rapidly solar installations have grown over the past 10 years. However, what really stuck out was how bad the forecasters got it wrong. Like many emerging technologies, solar began as being very expensive and cost prohibitive for most. Forecasters assumed some price reductions and adoption rising at a constant rate of change. Most had solar adoption leveling out and maturing by 2015. Instead, solar costs plunged 90% over the past decade, and the adoption of solar exploded higher. The reality ended up being 3x higher than forecasts.

Understand that many on Wall Street also think linearly. Market strategists and economists lean heavily on the past to instruct what’s likely to happen in the future – even though capital markets are extremely young in the scope of human history. Analysts arrive at a stock’s “fair value” estimate using financial models with steady growth forecasts that decelerate and mature in short order. This type of thinking has led to a lot of missed opportunities, whether that’s not participating in the biggest market winners over the past decade or selling stocks because the market’s valuation appears rich.

We live in exciting times. Every company and industry are undergoing pronounced change. Thinking exponentially may lead to overly optimistic forecasts at times. However, we believe that it’s going to lead to much better investment decisions versus the alternative. In markets, it’s better to be directionally right than definitively wrong.

The opinions expressed are those of Harrison Financial Services as of October 24, 2024 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested.