Consensus Estimate

You’re with six friends at a Buffalo Wild Wings because you love indigestion. You ask all six people how many wings they think you can eat.

Since you have little shame, they say the following: 16, 12, 18, 21, 18, and 11.

That is a total of 96. Which means 96/6 friends = 16 wings.

The consensus estimate is that you can eat 16 wings. You eat 24 wings, beating the consensus estimate by 50%. Hope you brought your Tums.

In finance, a consensus estimate is an outstanding term to define Wall Street's inability to predict anything about the future. Every quarter, companies project earnings. And, typically, the stock goes up or down based on whether or not it beat “consensus estimates” during their quarterly report.

So, let's say Apple is reporting earnings per share and revenue estimates. All of the analysts will submit their estimates (typically found on a Bloomberg Terminal) and an aggregate estimate, or consensus, will be compiled. The consensus estimate of 20 analysts might be earnings of $4 per share and $25 billion in revenue for the quarter.

If Apple reports $4.25 per share, but $22 billion in revenue, the tech giant beat earnings estimates, but fell short on revenue. If they report EPS of $4 per share and $25.5 billion in revenue, they were “in-line” with the consensus EPS estimate and beat revenue expectations.

This isn't just quarterly. There are consensus estimates for quarters, a fiscal year, and the following fiscal year. There are also consensus estimates on things like how many phones Apple might have shipped or sold, or consensus estimates by economists on the number of jobs created in a month.

Ironically, it turns out that professionals on Wall Street are not very good at this. In fact, most analysts should be fired and replaced by golden retrievers who don't need to make six figures to be extremely incorrect for a living. Just a good walk and a pat on the head.

Estimize, a website that allows anyone from housewives to ex-felons to make their own estimates as a form of crowdfunding, is 74% more accurate at projecting estimates than the consensus of professional Wall Street analysts whose entire job is to forecast and cover certain stocks.