The Investing for Beginners Podcast - Your Path to Financial Freedom

IFB339: Applying Base Rates to Stock Picks: Insights from Michael Mauboussin's Expertise

Mar 25, 2024

46:19

Andrew: Welcome to episode 339 of The Investing For Beginners Podcast. I’m Andrew.

Dave: And I'm Dave. Today we are examining the crucial interplay between market expectations and the evolution of companies, underscored by recent executive changes at Disney.

Andrew: Our focus extends to the practical applicability of base rates in valuation—a method for investors to ground their growth expectations in reality, inspired by the meticulous research of Michael Mobison.

Dave: We will delve into the pivotal metrics, such as CFROI, that savvy investors should monitor to judge a company's reinvestment efficiency and potential for long-term growth.

Andrew: And we cannot overlook the phenomenon of reversion to the mean, a fundamental principle that impacts companies across different stages of growth, sectors, and market valuations.

Dave: This episode is about equipping you with the tools and knowledge to navigate the complexities of investment opportunities with a critical eye and a measured approach.

Andrew: Prepare to engage with a conversation that’s as informative as it is imperative for anyone serious about their investment journey.

00:00 Gravity of capitalism and stock market cycle.

06:14 Sales growth vital for company's continued success.

08:49 Sales growth reverts to mean over time.

11:41 Research shows most stocks grow modestly yearly.

16:35 Market reversion to mean: fear and greed.

19:07 Legacy companies may lose or gain market share.

20:42 Adversity spurs creativity, innovation doesn't follow straight paths.

25:22 Understanding revenue and sales growth for companies.

28:15 Using base rates for reasonable revenue growth.

30:55 Value investing can lead to high returns.

35:40 Correlation between CFROI and sustainability in sectors.