How to identify companies that make lots of money for shareholders
Economic performance focuses on effective use of the capital invested in the company
revision
Does Wisdom of Crowds apply to earnings estimates, price targets, value estimates and stock prices?
The behavioral tail can wag the statistical dog
Be wary of using Return on Capital (ROC)
Superb companies produce a very high return on capital. But when substantial intangible assets don’t show up on balance sheets, the ROC numbers are unduly flattering to management.
Let’s face it, we’re really bad at patterns and statistics
In our hunt for the investment guru we get hit with a double whammy of cognitive errors. We see patterns in random data because we, as humans, love to find causes and patterns suggest causes. And, we jump to conclusions on the basis of statistically insignificant data, again, because we love to identify causes.
Lessons from the world of gambling
One apportions investment positions or portfolio weightings according to one’s informed estimate of each stock’s probable return; it is the weighting that provides the highest geometric mean of outcomes; betting your beliefs.
Why is it so difficult to change our view of things?
When we own a stock, let’s face it, we love to see articles and reports that confirm our positive view of our investment. It’s human nature. It makes us feel good. On the flip side, we tend not to see or notice negative opinions.
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