lundi 8 avril 2019

About predictability

I'm often writing about predictability. It's not everything, but it's a very important aspect of investing. After all, if you had the opportunity to buy a restaurant that will surely grow it's revenue by 10% year after year and another restaurant that may grow it's revenue by a range of 0 to 20% every year, which one would you buy?

A gambler would maybe buy the second one. But an investor would buy the first one.

An investor seeks visibility. A gambler seeks surprises and emotions. Often, a gambler is only someone who doesn't know how the market works and has no interest to understand. He wants to make money and gets some thrill from the great mystery of a stock going up 25% on a single day.


And how can we see the predictability of a stock?

There's Value Line, which is a great website. On a one-pager, it shows you everything you want to know about your favorite stocks. And among these datas, you can see the predictability of the stock. I have a free acess to that site but maybe you can't use it without paying. In that case, there's a few other options.

For instance, you could use the website of the Wall Street Journal. Just take a look at the estimates for a specific stock and see the range of estimates. For instance, Ulta Beauty which gets the 100% predictability score on Value Line:

The blue dot represents the earnings vs the line which represents the estimates. As you can see, the estimates are very precise. It's a line with a very thin blue zone around it that grows very slightly as years advance.

And then, Amazon which gets a very low predictability score on Value Line (lower than 30% predictable).

This time, we can see that the blue zone around earnings is very wide as years advance. Earnings should be growing, but the margin of error is much more important than with Ulta Beauty.

That's why predictability is important for me: with it, you know where you're going. Without it, you navigate in the fog.

3 commentaires:

  1. How is MTY on predictability. Another big move and the market did not like this particular move. Here's an article about it on seeking alpha:

    1. Until now, MTY hasn't made any big mistake. I trust the company more than almost any other company. It may not be a home-run, but it won't be a catastrophe.