The Little Book of Bull's Eye Investing by John Mauldin

Author:John Mauldin
Language: eng
Format: epub, azw3, mobi
Publisher: John Wiley & Sons, Ltd.
Published: 2012-04-09T04:00:00+00:00

Analysts make the fatally flawed assumption that because a company has grown 25 percent a year for the past five years, it will do so for the next five.

Analysts make the fatally flawed assumption that because a company has grown 25 percent a year for the past five years, it will do so for the next five. The actual results for the past 50 years show the likelihood of that happening to be remote. Only a very small percentage of companies can show merely above-average earnings growth for 10 years in a row. The percentage of such companies doing so is no more than you would expect from a random process.

The chance of picking a stock today that will be in the top 25 percent of all companies every year for the next 10 years is 1 in 50 or less.

In fact, the longer a company shows positive earnings growth and outstanding performance, the more likely it is to have an off year. Staying on top for an extended period is an extremely difficult feat.

Yet what is the basis for most stock analysts’ predictions? It is usually the combination of past performance and the optimistic projections of a management that gets compensated with stock options. What CEO will tell you his stock is overpriced? His staff and board would kill him, as his words would make their options worthless.

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