Forecasting is a vital part of any investment. Buyers do not purchase historical results. They buy what they perceive the company is expected to generate in the future. Although this expectation is often influenced by past results, future prospects are essential. At times, the future expected performance does not reflect historical performance. Here are a few examples of when historical performance is not a good indicator of future expectations.

1. A pay phone company's future expected performance after cell phones.

2. A small town lumber yard's future expected performance after Home Depot moves in across the street.

3. A local automotive parts supplier's future expected performance after its main customer announced they will be closing their automotive assembly plant and laying off all of the employees within 12 months.

Would you buy stock in any of these businesses based on a forecast of historical performance? Changes in technology, competition, and customer's buying patterns can and do have an impact on the company's future operations. Sometimes the full impact of these changes is not part of the company's historical data.

The economy also has an impact on a company's future performance. Meteorologists use barometers and other tools to predict future weather conditions. Like meteorologists, economists and business appraisers use tools and techniques to predict future economic conditions. Although there is no single economic indicator that is consistently accurate in predicting the business cycle, there is a composite of economic indicators that tend to move up or down ahead of the business cycle.

This composite is more commonly known as the Composite Index of Leading Economic Indicators. This composite of indicators is used to predict future economic activity approximately six to nine months in advance. As a rule, three or more months of continued declines in the index indicate the start of an economic contraction. A good place to find this information is on the Conference Board's website at http://www.conference-board.org. Just look for the leading index section.

The national, state, and local economies need to be understood before you make a forecast. Knowing how the national economy influences the state economy and how the state economy impacts the local economy is fundamental to a credible forecast. Having a good understanding about the industry, competition, suppliers, and government regulations is vital to credibility.

A forecast performed by an independent professional with an unbiased point of view will be more credible than a forecast performed by an insider.

Let's face it. Depending on the reason, some forecasts are projected to be a doomsday scenario like an owner's forecast when he or she has to buy out a stockholder. Forecasts can also be overly optimistic when it comes time to sell the business. Here are a couple of things to remember. An analysis of the company's history is not a forecast. A weighted average of the company's historical performance is also not a forecast.