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COLUMN PREDICTIONS FOR 2012 WORDS BY HORACE DEDIU, APPLE ANAL YST REPRINTED FROM ASYMCO.COM I have none to offer. It may sound strange to hear me say that I don't make predictions even though I often talk about how things will change and even provide some forecasts. The difference is one of degrees. A prediction to me is a very specific, time-sensitive and materially valuable recommendation. An observation about the future is an imprecise, intuitive hunch based on pattern recognition. It's mushy. It's theoretical. It's the difference between saying a company is great and recommending to buy its stock with a price target in a time frame. But it gets even weirder. One of the recurring themes in Apple analysis has been that independent analysts, as a group, have been, on average, more accurate in quarterly forecasting than highly paid Wall Street Analysts. Many have asked why. I believe that the answer is because independent analysts are theorists who make observations while professionals are data gatherers who make predictions. First, we should understand the reasons why each group does what it does. Wall Street sell side analysts are rewarded for making Buy/Sell recommendations that cause clients to retain the services of the firm they work for. They are not paid to be accurate with specific forecasts in fundamentals. They are paid to predict how stocks move. The objective is not to be accurate in the quarterly but to support the "call" or prediction. The disconnect from accuracy comes in trying to sustain the call with a "conservative" forecast. For example, an analyst with a "Buy" recommendation (and a prediction in the form of a price target) thinks Apple could ship 30 million iPhones this quarter and generate EPS of $10. But he also thinks the stock looks cheap even if they only ship 28 million iPhones and report EPS of $8.50. In this scenario he's incentivized to publish the lower (less accurate) number. That way he supports his prediction. By dampening expectations, the stock rises on the "surprise." Because an analyst sells predictions, he self-censors what he believes. Contrast that with the motivation of an independent analyst (aka blogger). His motivation is to (presumably) gain a reputation of accuracy and insight. He sells his reputation as a keen observer. Precise predictions or recommendations can turn out wrong quite often. Getting caught with these errors exposes the independent to instant negative feedback. The risk is far greater than the opportunity. So here is the difference: Analysts have an incentive to put forth a version of the future that supports their call on the stock. Bloggers have an incentive to put forth the most accurate version of the future. By taking the prediction out of the picture, accuracy in describing the future improves. So I don't have any predictions or recommendations. I just hope to help you see patterns that lead you to making your own predictions. 32 MacDirectory