Use base rates to inform growth expectations
The thesis argued is that investors should use 'outside view' base rates - historical precedents of similar situations - to evaluate the likelihood of a company sustaining high growth rates, rather than relying solely on an 'inside view' of the company's current prospects.
The argument
The guest Michael Mauboussin argued that while a company growing at 25% may look poised to continue doing so, historical base rates show very few companies actually sustain that rate over a decade. The speakers noted that while some modern tech giants have defied historical base rates due to network effects and returns to scale, marrying the inside and outside views remains a superior approach to assuming a company is an exception.
The thesis, stress-tested
✓ What validates it
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▸ Risks discussed
- ▸Relying too rigidly on historical base rates can cause investors to miss structural shifts, such as network-effect businesses that defy historical precedents
- ▸Using the wrong reference class can lead to inaccurate base-rate comparisons
Hear it yourself
"So if I'm looking at say, like a growth company that's growing 25% a year, I might look at what's going on with the company, and its prospects, and everything like that, and say, what are the odds that growth could continue at 25% for the next decade, or something like that."
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