New Mauboussin Paper: What’s Going On in Your Brain?

“We are natural pattern seekers and we see them even where none exist. Our brains are keen to make causal inferences, which can lead to faulty conclusions.” Mauboussin & Callahan, What’s Going On in Your Brain? Common Investor Biases and Where They Come From

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Want More?

See here for a collection of links to other Mauboussin papers.

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New Mauboussin Paper: Sharpening Your Forecasting Skills

“Below the headline of expert ineffectiveness were some more subtle findings. One was an inverse correlation between fame and accuracy. While famous experts had among the worst records of prediction, they demonstrated ‘skill at telling a compelling story.’ To gain fame it helps to tell ‘tight, simple, clear stories that grab and hold audiences.’ These pundits are often wrong but never in doubt.” Mauboussin & Callahan, Sharpening Your Forecasting Skills: Foresight Is a Measurable Skill That You Can Cultivates

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Want More?

See here for a collection of links to other Mauboussin papers.

New Mauboussin Paper: Total Addressable Market (incl. Checklist)

Title: Total Addressable Market – Methods to Estimate a Company’s Potential Sales
Authors: Michael J. Mauboussin & Dan Callahan, CFA
Date: September 1, 2015

“TAM is an area where overconfidence and optimism are rife. We have provided some analytical approaches to check these biases and to come up with a reasonable assessment of whether the market’s expectations are reasonable.” —Mauboussin & Callahan, Total Addressable Market – Methods to Estimate a Company’s Potential Sales

The concept of total addressable market (TTM) is the subject of Mauboussin and Callahan’s most recent paper.

“The ability to calibrate the total addressable market (TAM) is a major part of anticipating value creation. Since 1960, about one-third of the value of the S&P 500 Index has been attributable to the anticipated payoff from future investment. Assessing value creation requires understanding how much a company can invest and the returns those investments will earn.

We define TAM as the revenue a company would realize if it had 100 percent share of a market it could serve while creating shareholder value. TAM is a concept that executives and investors use frequently, but that few define properly or thoughtfully. You should recognize up front that TAM is not about how large a firm can grow to be but rather how much it can expand while adding value”

Click on the image below to read the paper.

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Included in this paper is an checklist addressing certain important questions to consider when performing an analysis of TAM.

Checklist for Estimating a Total Addressable Market

Categorizing New Products

  • Is the product technology new or current?
  • Are the customers new or current?

Market Size

  • Are the users and payers of the good or service the same?
  • How much money do the buyers have?
  • Are the resources of buyers growing or shrinking?
  • Are there physical limitations, such as how much one can eat or use a product, that can curb demand?
  • What is the elasticity of demand?
  • How cyclical is demand?
  • How do consumers allocate their time and money now and how might that change?
  • Are the suppliers and sellers of the good or service the same?
  • What is the business’s production capacity?
  • Is there a reliable infrastructure to get the goods or services to market?
  • How broad is the geographical footprint?
  • Where is the industry in its life cycle?
  • What does that imply about the growth rate and pricing flexibility?
  • Does manufacturing capacity match the rate of growth in demand?
  • Is the company using pricing as a lever to drive scale or to increase profitability?
  • Are there existing or potential economic or social regulations that could limit TAM?
  • What are management’s incentives and are they aligned with shareholders?
  • Are there economies of scale? Local? National? International?
  • Are there two or more competitors, which could push each company into a separate niche?

TAM and the Bass Model

  • Which stage of the life cycle is the company’s industry in?
  • What analogous products can inform your estimates for the Bass Model parameters?
  • Limitations of the Bass Model When a consumer buys something once, how frequently does he or she replace it (repurchase rate)?
  • Has the company’s good or service overshot the market?
  • Might that happen soon?
  • Does the company have a competitive advantage that will allow for value creation over time?
  • Do network effects exist?
  • Consider Base Rates What happened to other companies when they were in a situation similar to the one you are examining?
  • Are your TAM estimates plausible when considering these base rates?

TAM and Ecosystems

  • Does the company operate primarily a physical, service, or knowledge business?
  • What is the company’s source of advantage?
  • What are the investment triggers?
  • Does the company sell rival or nonrival goods?
  • Are there opportunities to extend into new business categories?

Want More?

See here for a collection of links to other Mauboussin papers.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

New Mauboussin Paper: Capital Allocation – Updated Evidence, Analytical Methods, and Assessment Guidance

“The problem is that many CEOs, while almost universally well intentioned, don’t know how to allocate capital effectively.” —Mauboussin & Callahan, Capital Allocation – Updated Evidence, Analytical Methods, and Assessment Guidance

Thanks a lot to a reader of the blog for sending me the link to this new paper!

Another great read (dated June 2, 2015) is out from Mauboussin and Callahan, both currently at Credit Suisse.

Below en excerpt from the frontpage of the paper describing the content.

• Capital allocation is a senior management team’s most fundamental responsibility. The problem is that many CEOs don’t know how to allocate capital effectively. The objective of capital allocation is to build long-term value per share.

•Capital allocation is always important but is especially pertinent today because return on invested capital is high, growth is modest, and corporate balance sheets in the U.S. have substantial cash.

• Internal financing represented more than 90 percent of the source of total capital for U.S. companies from 1980-2014.

• M&A, capital expenditures, and R&D are the largest uses of capital for operations, and companies now spend more on buybacks than dividends.

• This report discusses each use of capital, shows how to analyze that use, reviews the academic findings, and offers a near-term outlook.

• We provide a framework for assessing a company’s capital allocation skills, which includes examining past behaviors, understanding incentives, and considering the five principles of capital allocation.

Click image to download PDF. Also, the Mauboussin link post will be updated to include this one to.

NM1When I woke up this morning I saw that Michael himself had written a few words on his Twitter account about my collection of links to his papers. For an amateur like myself this felt great!

Skärmavbild 2015-06-20 kl. 16.20.09Happy midsummer to all of you out there!

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

New Paper from Mauboussin: IQ versus RQ, Differentiating Smarts from Decision-Making Skills

“We think, each of us, that we’re much more rational than we are. And we think that we make our decisions because we have good reasons to make them. Even when it’s the other way around. We believe in the reasons, because we’ve already made the decision.” —Daniel Kahneman

A new paper is out from Mauboussin and Callahan, both currently at Credit Suisse.

Warren Buffett is quoted in the introduction of the paper.

Warren Buffett has plenty of horsepower and output. But when asked about his success, Buffett emphasized that it was RQ that made the big difference, not IQ:

How I got here is pretty simple in my case. It’s not IQ, I’m sure you’ll be glad to hear. The big thing is rationality. I always look at IQ and talent as representing the horsepower of the motor, but that the output—the efficiency with which that motor works—depends on rationality. A lot of people start out with 400-horsepower motors but only get a hundred horsepower of output. It’s way better to have a 200-horsepower motor and get it all into output.

Click image to download PDF. Also, the Mauboussin link post will be updated to include this one to.

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