Investing Desk picks #3
Regression to the mean is dead? & How to value companies
Snir's investing desk is a newsletter focused on intelligent, value investing for the individual investor. The subjects are evergreen and deals with the essence of investing, mental models, and concepts.
Things I read
Is regression to the mean dead?
Regression to the mean, or mean reversion, is one of the many tools in the arsenal of a value investor.
If you are unfamiliar, I gave a basic introduction to the concept on Twitter:
Mean reversion is a concept very important to the value investor.— Snir David (long term investing) (@snird) October 28, 2020
Understanding regression to the mean can fuel your best investments.
Attached a first example of the concept of Chipotle.
Let's explore what it is in this thread 🧵 pic.twitter.com/4t1eHZ2kKD
Last week, I wanted to send a friend an article explaining this investing concept. So I searched "value investing regression to the mean".
The first results I got were pretty grim (and recent):
Reversion to the Mean Is Dead. Investors Beware. by Adam Seessel
These are great articles, I highly recommend reading them, as I highly recommend to always hear out the other perspective.
They have some great points there. The first article is even based on a research done in New York University, at their business school.
With the research, I have some issues with the methods and the definition. They are absolutely correct according to their definition of it - but I define the regression to the mean strategy as going along with fundamental research. Understanding why the current downturn is happening and when or how will it be resolved is an essential part.
Merely looking at downturns in price then upticks in a statistical manner does no fulfill the fundamental research part.
The second article, by Adam Sessel, gives great points too, and he's right: mean reversion is much harder for big companies.
But for a retail investor, who manages 100k$? 400k$?
We have a whole world of non-big-tech companies to utilize this strategy with.
Things I watch
Aswath Damodaran is a professor of finance at NY university. He is also an author of an amazing blog.
One course he teaches regularly, and a subject he writes a lot about, is company valuation. His valuation course is available for free by the way on his site.
But for those who don't want to go through 35+ hours of course lectures and some multiple of that in reading the additional content - his talk at Google is a great essence of the course content.
He has so many great ideas, that trying to summarize it will only reduce the meaning to nothing. And this 1-hour lecture is already a summarize of sort of the full course.
I highly recommend watching, for you guys who want another angle on valuation. He definitely brought some change to my mundane DCF valuations.