Some Thoughts on Investing, an Ongoing List. (Borrowed and not)
Dont “invest in the present”; imagine the situation and narrative as it will likely exist 12+ months from now.
Most forecasts are over-reliant on current realities.
Market efficiency is not a fixed property of a market, it is the end point of a process. When identifying a security that is expected to generate super-normal returns, always ask, why? The market is a reasonably efficient machine, if you can not identify why potential super-normal returns exist in this investment….perhaps they don’t
Equity markets are bad at correctly pricing 40%+ revenue growth and negative revenue growth. Outside of substantial changes to profitability, they usually more efficiently price 2-10% revenue growth.
Confidence in a forecast may increase with the amount of incremental information put into it, but the accuracy may stay the same. As analysts, we are prone to gather more and more facts to build conviction around a particular investment. While incremental information is often important, it can also convince us that our accuracy is higher than reality. This can be just as dangerous as ignorance itself.
Growth investors can be a lazy breed, and thus are prone to investing based on stories and narratives. Simultaneously, underlying realities of businesses and industries may not be apparent for years. It is often as important to understand what current narrative rules a specific business or industry. Often that narrative differs substantially from the underlying business reality. Periods during which narratives change can create substantial opportunity and risk.
When modeling the future of dynamic growth (Read more...)