1/ Here’s an overlooked widely under appreciated thing about investing.
First, the captain-obvious no-duh punchline:
look where few others are looking,
be roughly right (not precisely wrong) where superior precision analysis is unnecessary...
2/ All new things come from combos of old. Let’s take two old laws and combine them.
Sturgeons Law + Bayes Law.
I’ll show you that you can hire an analyst with 90% accuracy (!) and you will still have ONLY 50/50 odds of selecting a good investment—IF you look where others are
3/ Let’s take 100 potential investments.
Sturgeons Law playfully tells us 90% of stuff is crap
90 companies are crap
-Your analyst has 90% accuracy rate discerning between crap & good
-What are odds the good co they recommended is *actually* good?
4/ Of the 90 crap they correctly said 81 are crap but mistook 9 as good (.9*90)
Of 10 good they correctly said 9 good (.9*10) but mistook 1 as bad
They present to you 18 good co’s
But only 9 are actually good
Your 90% accurate analyst?
No better than a coin toss!
5/ SO: either increase analytical accuracy (impossible, given .300 accuracy gets you in hall of fame)
Go where barriers are higher, there are fewer crappy co’s because there are fewer co’s—so its maybe half-Sturgeon and instead of 10% being good, 45% are good...
6/ Much prefer and frankly much easier to select say 1 of 5 possible companies to fund than 1 of 5,000.
It’s why I’m psychotically focused on structural competitive advantage—
Less than 5 Co’s in
-nuclear waste tech
-metal 3D printing
You can follow @wolfejosh.
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