“Take a simple idea and take it seriously.” - Charlie Munger
Hello and thank you for checking out Intrinsic Return!
This newsletter is my attempt to take a couple ideas seriously. (A) I try to invest with a long-term, ownership mentality and keep my focus on what a business might look like in 10+ years. (B) I keep score of my forecasts, just like the Good Judgment Project. This has many benefits including holding me accountable and providing feedback to help improve. I’ll explain a little more below.
(A) What do I mean by intrinsic return?
As an investor, my starting assumption is that I won’t have the opportunity to sell any investment for decades. Next year’s earnings, valuation multiples, and relative valuations really don’t matter *directly* if I can’t sell my investment. What does matter?
As Buffett followers can recite: A long-term owner’s investment return will be determined by the cashflows paid to owners. When I say intrinsic return, I mean the annualized return (IRR) that an investor will earn over the life of a business based on today’s stock price and the cash paid to shareholders (or that *could* be paid to shareholders if desired).
Estimating intrinsic return is an exceptionally difficult and uncertain forecasting exercise. I have no magic bullet. I think any attempt to forecast 10+ years in the future must strongly consider a business’s culture, operational capability, future technological changes, competition, management incentives, etc.
Most of the time my forecasts are so uncertain as to effectively be in the “too hard pile” and un-actionable for investing purposes. My hope is that I occasionally add some small value by identifying risks or asking questions that haven’t received enough attention.
I very rarely have good answers. My goal is to ask the right questions!
(B) Keep score of forecasts.
I ask resolvable forecasting questions for estimating intrinsic return. For example, what will the company’s revenue/share CAGR be over the next 10 years? Rather than make a single point forecast, my forecast will be a probability distribution just like the Good Judgment Project.
Why keep score of forecasts like this?
(1) I will get objective feedback on my confidence calibration. When I forecast 90% that something happens, does it actually happen 90% of the time? If I’m well-calibrated then it will. If I’m over-confident then when I forecast 90% it might only happen 70% of the time. While a single outcome means little, aggregating many such questions provides feedback that I can learn from.
(2) Resolved forecasts can be scored for accuracy. The Good Judgment Project used Brier scores and that will be my default. By keeping score it is possible to measure who the most accurate forecasters are. It is also possible to measure if discussing an idea with others leads to more accurate forecasts or to groupthink. This is done by comparing forecast accuracy before and after a discussion.
Readers who are interested in honing their forecasting skills are encouraged to forecast alongside me on the maby forecasting app!
(3) Forecasting probabilities can bring clarity to a discussion, in a way that words can’t. It is not uncommon for two analysts to debate a key risk and agree that it is “definitely possible”. They walk away thinking they are in full agreement, until they are asked what probabilities they assign. One says 3% and the other says 30%. Quantitative forecasts can help highlight areas of disagreement (or agreement), and spur further conversation and thinking.
(4) The simple act of forecasting can help serve as a catalyst to think more clearly. Knowing that I’ll be scored on my forecast and not wanting to be embarrassed, I’m forced to think carefully about the counter-arguments of those who disagree with me.
A little about me
My name is Tom Liptay. My background is all over the place including stints as a fund manager, a CFO, a hedge fund analyst, an electrical engineer, writing a doctorate on nanocrystals, and doing some web development. My investing idols include Buffett, Munger, and Li Lu.
I’m a Good Judgment Project superforecaster who finished 1st place in my GJP year 3 group, GJP year 4 team member, CFA 2019 GJO challenge, and I beat a group disease experts forecasting COVID-19. I’ve taught forecasting best-practices to financial firms and the intelligence community.
I don’t like writing, but I love investing and forecasting.
Why subscribe?
If the above sounds interesting, I’d love to have you as a subscriber and a fellow forecaster!
