Confidence Or Predictability Scoring

[Eldad]

Today I was listening to Terry Smith and he was saying FCF yield + growth rate will give you an approximate expected return (oversimplification I know). So I went through all of my holdings and did the simple calculation. Then I did future will equal the past % confidence/predictability score. 
 

So for BRK it was 8% growth + 5.5% owners earnings x 100% predictability = 13.5%
 

Then CSU I did 18% + 5.5 x 50% = 11.75% 

 

I know this is all pretty obvious but I have never really tried to quantify the confidence in the predictability of the future like that. It has always been just sort of a gut feeling. It actually really helped to see all the holdings laid out like that. 
 

Then I started thinking about a stock I don’t own, NVR. Although it will be lumpy, I don’t think there is really much longterm risk that their future will not look like their past. NVR sort of blew away everything else with a high confidence % applied. 
 

Anyway, do any of you have a scoring system or checklist for predictability? Technology sector would be a negative. Large insider ownership a positive etc. etc. 

 

Let me know your thoughts. 

[nsx5200]

IMHO, there is also a time element to that as well.  Like on Tariff Day, VIX spiked, and there's a near 100% chance that it will fall back down, the uncertainty is in the time.

 

Using some system helps to identify the situation and the tool needed.  Some situations requires more hands-on trading or constant monitoring, whereas others can more or less be left alone for decades.  I actually started trying to keep track of the thesis, estimated return ballpark range and estimated timeframe in a spreadsheet (and not a DB w/ custom queries for those that read the Microsoft related thread), so I can go back and review how wrong I was.  After a while, I think it can be turned into a catalog of scenarios and proper tools(mental models?) for tackling them.  Isn't that how the pros in other fields really do it?  Measure the error, adjust, repeat and hope to be >=1% better every time?

 

In terms of predictability, I almost think you get a feel once you spend enough time in the topic.  I'm wary of slapping a single hard percentage on stuff because it feels like false precision, but I think it helps to put put down the general ball park range, like 10-25% vs 50-70%, or if really new topics a wide range like, 10-90%.  Same thing can be said for guesstimating the time frame as well.

[UK]

11 hours ago, Eldad said:

So for BRK it was 8% growth + 5.5% owners earnings x 100% predictability = 13.5%

I think owners earnings overstates FCF here. But 6+2 to 8+3 could be the answer.

[Eldad]

1 hour ago, UK said:

I think owners earnings overstates FCF here. But 6+2 to 8+3 could be the answer.

Maybe so. Hard to get a good number on them with all of the utility and train growth capex and the insurance blah blah blah. 

[UK]

19 minutes ago, Eldad said:

Maybe so. Hard to get a good number on them with all of the utility and train growth capex and the insurance blah blah blah. 

On the other hand, with some luck 1-2 difference is not impossible to overcome either. 

 

I like this formula, much easier to do and not to fool yourself vs some deep DCF model:)

Edited January 23 by UK

[SharperDingaan]

Growth rate, FCF yield, and predictability are just guesstimates. Historic growth and FCF yield assumed to continue, prediction % assumed to be accurate. Better than nothing, but only in an extended and unchanging environment.

 

A lot simpler, is to simply justify why, whether 2 quarters out, the price of XYZ coy is likely to be higher than it is now. Buy if the answer is higher, sell if it is lower; shrink the period to 1 quarter when higher volatility or seasonality is present. Always biased to up-drafts, avoidance of reasonably forseeable losses, lots of ways by which to execute.

 

Record today's justifications, review them at both 2 and 4 quarters out, ongoing findings inform future prediction. All of a sudden, social media starts to work for and not against you, and the swing trade opportunities become obvious     

 

SD

[brobro777]

I dunno this confidence or predictability thing is something that can be distilled into some kinda checklist. It's one of those things that you see qualitatively. For example that dude Annenberg talking about the Daily Racing Form in that Buffett book Snowball. Annenberg said it had a characteristic of Essentiality, which means it was all too predictable that degenerate gamblers were going to continue to buy that shit when they want to bet on horses. Another example, my buddy's father who smoked Winstons for 30 years. It was all too predictable that he would continue to smoke Winstons - just like me sticking with Marlboros 

 

I guess you can assign % numbers and that would vary according to your personal experience and track record. But all this percentages and checklists sounds like it's for bunch of value investor nerds, not me baby