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Thoughts and Ideas / Base Rates
« Last post by galumay on January 27, 2019, 08:48:58 AM »
Tweet thread by the brilliant @jposhaughnessy

1/Base Rates are Boring (And REALLY Effective)
The majority of investors, as well as anyone else using traditional, intuitive forecasting methods, are overwhelmed by their human nature. They use information unreliably, one time including a stock in a portfolio and another time

2/ excluding it, even though in each instance the information is the same. Our decision-making is systematically flawed because we prefer gut reactions and individual, colorful stories to boring base rates. Base rates are among the most illuminating statistics that exist.

3/They’re just like batting averages. For example, if a town of 100,000 people had 70,000 lawyers and 30,000 engineers, the base rate for lawyers is 70 percent. When used in the stock market, these rates tell you what to expect from certain class of stocks

4/(e.g., all stocks with high dividend yields) and what that variable shows for how that category of stocks have performed over many decades of data. We have found that since the original publication of "What Works on Wall Street" in 1996, the

5/performance of the various factors we studied has persisted. Remember that the base rates tell you nothing about how each individual member of that class will behave, rather they indicate how all stocks with high dividend yields–or whatever factor is being reviewed—will behave.

6/Most statistical prediction techniques use base rates. 75 percent of university students with grade point averages above 3.50 go on to do well in graduate school. Smokers are twice as likely to get cancer. The average 70-year old in the United states can expect,

7/based on actuarial tables, to live another 13 ½ years. Stocks with low PE ratios outperformed the market in 99 percent of all rolling ten-year periods between 1964 and 2009. The best way to predict the future is to bet with the base rate that is derived from a large sample.

8/Yet, numerous studies have found that people make full use of base rate information only when there is a lack of descriptive data. In one example, people are told that out of a sample of 100 people, 70 are lawyers and 30 are engineers.

9/When provided with no additional information and asked to guess the occupation of a randomly selected 10, people use the base rate information, saying that all 10 are lawyers, by doing so they ensure themselves of getting the most right.

10/However, when worthless yet descriptive data was added, such as “Dick is a highly motivated 30-year-old married man who is well liked by his colleagues,” people largely ignored the base rate information in favor of their “feel” for the person.

11/They’re certain that their unique insights will help them make a better forecast, even when the additional information is meaningless. We prefer descriptive data to impersonal statistics because it better represents our individual experience.

12/Then when stereotypical information is added, such as “Dick is 30 years old, married, shows no interest in politics or social issues, and likes to spend free time on his many hobbies, which include carpentry and mathematical puzzles,” people totally ignore the base rate

13/and say that Dick is an engineer, despite a 70 percent chance that he is a lawyer. This bias has been proven time and again with numerous tests over a range of subjects. People always default to making predictions based upon their individual experience and intuition.

14/It’s difficult to blame people. Base rates are boring; experience is vivid and fun. The only way anyone will pay 100 times a company’s earnings for a stock is if it has a tremendous story. Never mind that stocks with high PE ratios beat the market less than 1 percent of the

15/time over all rolling 10-year periods between 1964 and 2009—the story is so compelling, you’re happy to throw the base rates out the window. And *nothing* has changed here nor do I think it will in my lifetime. Arbitraging human behavior is the last sustainable edge.
General Discussion / Towing Mirrors | Caravan Covers For Sale | 4WD Accessories
« Last post by taurus on January 10, 2019, 07:01:39 PM »
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General Discussion / Buy 4 Wheel Drive Accessories | 4WD Accessories Online Store
« Last post by Jasmine1 on December 22, 2018, 03:06:19 PM »
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General Discussion / Re: Decision Journal
« Last post by galumay on November 08, 2018, 06:46:18 PM »
Thinking I should sell ADA, they released a profit guidance for the FY with a projected drop in profit of around 25%, management are abjectly failing to execute and in the past I have held businesses like this waiting for them to turn around. This time I think its time to sell, can always buy back in later if they do manage to start running the business profitably. The adjusted IV based on drop in EPS would be at or below current price.

Well missed out on the sell, tryed to get out at $1.45 this morning but the bottom dropped out of the market, they are now under $1. Now my inclination has flipped to thinking they may be worth averaging down at below $1. $1 would be around the IV if EPS drops by 30% this year. The choice is between selling and losing $15k now, or averaging down with another $5k which would leave me with a $32k investment worth $15k, or holding at an average of $2.25

Averaging down doesnt make sense, doesnt reduce the average price much and just commits more capital. So its sell or hold!

Well the price keeps dropping and the averaging down is starting to become a consideration, on a value point of view, if I assume a drop in EPS of 35% this year, i get an EPS based IV of around 90c, given that its trading at under 80c now, that is a further 10% margin of safety.

In terms of averaging down, it brings the average price down to $1.78

Can now average down at 68c and bring the price to $1.65. That means they would still have to more than double for it to be profitable.
Shares / Re: KME
« Last post by galumay on November 07, 2018, 12:12:59 PM »
update from DMX Caital,

Kip McGrath Education Centres Limited (ASX:KME) – AGM 26 October 2018; +29% for month
At its AGM, leading tutoring company Kip McGrath noted that its FY18 result (41% increase in profit) was the seventh
consecutive year of increased profits, and said that based on results to date, FY19 will likely continue that trend.
The increase in profit has been (and should continue to be) driven by an increase in the number of students taught. Students being tutored are increasing because of:
1. The global market has shown an annual growth rate in excess of 10% in recent years;
2. The company’s initiative in doing national advertising has yielded significant student growth; and
3. KME’s products and service have improved with the new software that has been written.
We continue to expect strong revenue growth and margin expansion to deliver an EPS increase of 20% in FY19.
Thoughts and Ideas / Re: Psychology
« Last post by galumay on October 28, 2018, 03:33:09 PM »
And a problem here is this thing behavioral psychologists call self-attribution bias. It describes how when good things hap- pen to people they think it’s because of something they did, but when bad things happen to them they think it’s because of something someone else did.
General Discussion / Re: Decision Journal
« Last post by galumay on October 28, 2018, 09:40:02 AM »
I am starting to come to the view that one of the biggest errors in my investing history has been failing to sell my positions in businesses that have failed to execute in the way I had hoped. My strength has probably been not selling the positions in businesses that have executed as well or better than I hoped.

As part of this thought process I am looking at my personal portfolio and considering how to adjust for this error. In alphabetical order,

AHZ - Should have sold when I realised management interests were not aligned with the business or shareholders. I actually specifically identified this point in time and failed to act. I cant sell now as they are suspended.

CDA - best performer in the portfolio, a multibagger. Should have put more into the position as management executed the turnaround, I did average down a little, but should also have averaged up.

ICU - a stupid exercise in trying to short term trade, something I since came to accept was outside my circle of competence. SELL

KPT - although price has dropped, management executing as planned and remains a long term high conviction postition. HOLD

LPE - ditto, next 4C very important for conviction on postion HOLD

MOC - I have held because of the yield and more recently because of the belief that the financial services sector may be a growth area for the business. SELL

NWH - My big mistake was not averaging down when NWH went to 20c, as I did in the SMSF. Still a strong HOLD

SND - Should have sold when the business failed to execute, still possible its able to turn around and need to look at H1 report when it comes out.

VRS - bought too early, position size is so small its probably not even worth exiting.
General Discussion / Re: Decision Journal
« Last post by galumay on October 05, 2018, 06:53:59 PM »
Guys of Gove.

Cons- cant find someone to manage business, then 1 of us have to run. (at any time)

       - Opportunity cost, if we do this we cant do much else.

       - Create debt

       - catostrophic risk - one of us dies, town closes, cyclone.

       - more work/involvement/stress

       - Negative impact on family
       - Working with staff


Pros -   Potential passive income stream

       -   High return on invested capital

      -   Possibility of active engagement in both the business & community.
      -  Providing employment opportunity

      -   Leverages the line of credit in our IO loan while its still IO.

Alternatives - Do nothing
      -  Buy more property
       - buy commercial property

      - potential investment with Putty

      - do nothing now, something later

      - Buy Phil's business

     -  Start a similar business from scratch after they leave.

     - Invest similar amount in share market.


   - Follow up lease

   - Talk to Jess

   - Decide on a structure

General Discussion / Re: Things People Say...
« Last post by galumay on September 16, 2018, 09:32:44 AM »
Jeff Besoz, "look for missionary not mercenary businesses/business owners"
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