Durability & Reliability - making more robust forecasts
Knowing where to find info, Understanding it, Forecasting based on it

Find a couple of stocks
First you need to find at least a few prospective stocks to invest in, and assess their cheapness based on given (so called “consensus”) information about current and future prices and profits: “Is it cheap, cheap enough, how cheap, compared to what? What does ‘cheap’ mean? What returns can I expect?“
Then the objective is to improve the forecast quality, by modeling future earnings ourselves, based on our understanding of the company’s business model and industry characteristics, as well as some of its closest industry peers.
Make good forecasts based on real information and analysis
To make better forecasts we need to understand more about the company we’re researching: “How does it create value?”, “Is it in any way differentiated from other businesses in its industry?”
I see mainly three important parts in this process:
- Knowing where to find the right information (reading official company reports and news as effectively as possible).
- Understanding what the reports say about the company’s business dynamics, i.e., how competing companies, customers and suppliers interact in the economy trying to maximize their profits, and what that means for the company’s profit and cash flow generation potential.
- Making reliable forecasts based on similar companies and situations in the past, regarding market position, competitive advantages in terms of size, costs and uniqueness etc., and typical trajectories for growth and profitability
Make better forecasts!
TIP: first make sales and earnings forecasts based on the information in an old annual report (for Apple, Microsoft, Walmart or whatever company you want), then check what the outcome was and how close your forecasts came. Why did you miss? There’s your key to improving until next time!
The most common beginner mistake (for people with less than 1-2 years experience analyzing stocks) is to fall in love with a stock and become overly optimistic about its future potential and therefore being willing to overpay for it. This typically results in poor performance or losing money.
A good rule of thumb to counteract this common tendency is to limit the size of any individual stock in your portfolio to maximum 5% of your money. This way you will limit your potential losses while you are learning and gaining experience.
With practice, you will learn how to make faster and better assumptions and (more importantly) how to avoid making unrealistic and overoptimistic assumptions.
At that point you may increase the size of your stocks and even opt for a concentrated portfolio with only a few (thoroughly analyzed) stocks that you understand well.
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