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Heuristics in investing

Heuristics in investing

I think a very powerful idea in investing is the use of heuristics:
By using certain heuristics you can completely wipe out entire categories of errors. As an example, let’s say “technical analysis” works in some instances. If we act as if technical analysis doesn’t work at all, our overall results will be better over time simply by wiping out the multiple errors that we can make by using it.
To start with, I want to tackle a concept that almost seems to make sense: the target price, defined as “A projected price level as stated by an investment analyst or advisor”.
If I were to model the price of a stock I think I couldn’t even use a statistical variable following a probability distribution, much less a specific price, so why hold on to this concept?
The way I value a stock is not by a specific number (although this is how it is trade in the stock market), and not even by a statistical distribution, but maybe by using a small set of rules.
As an example, let’s take business ‘A’. Let’s say that in 10 years from now the nature of the business will remain largely the same, it will retain pricing power, it won’t need large amounts of capital expenditure, it can expand to such and such countries, it has this kind of economics, etc… and it sells at 10 times earnings. Using a historical 15 times earnings in the US as a yardstick (admitedly belonging to a a bygone era of higher returns) this is probably a great investment. Thus we can decide to allocate a big portion of our portfolio on it. The key thing is to realise that this kind of situation not only happens frequently enough to guarantee a good investment record on the long run, but that you probably can’t be any more accurate than this.
As well as “target price” another notion of very little usefulness is calculating the DCF value.
Thus a very powerful heuristic in investing would be to altogether avoid attempting to calculate DFC valuation for a more robust track record over time.
Simple enough, but maybe not easy.

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