Michael Mauboussin's article about "ROIC Patterns: Luck, Persistence, and What to Do About It".
- Analysts modeling future corporate financial performance should use past return on invested capital (ROIC) patterns, including a strong tendency toward mean reversion, as an appropriate reference class but rarely do. Full consideration of the difficulty in sustaining high returns should temper the optimism inherent in many models.
- Some companies do post persistently high or low returns beyond what chance dictates. But the ROIC data incorporate much more randomness than most analysts realize.
- We had little luck in identifying the factors behind sustainably high returns.
- This analysis has concrete implications for modeling. We unveil some of the common errors in discounted cash flow models and offer some thoughts on how to improve them.
- Article Link - Mauboussin on Strategy: Death, Taxes and Reversion to the Mean. (PDF)
- Audio Podcast Link
1 comment:
investors should realize that returns reverses to the mean - the key to investing is anticipating any reversion and comparing it to expectations.
nice job on this post.
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