Michael Mauboussin: The Impact Of Intangibles On Base Rates

Johnny HopkinsMichael MauboussinLeave a Comment

In his latest paper titled – The Impact of Intangibles on Base Rates, Michael Mauboussin discusses how the dominance of intangibles will lead to higher growth and more dispersion in base rates. Here’s an excerpt from the paper:

Accurate forecasts combine causal and statistical thinking in proper measure. Statistical thinking relies on identifying an appropriate reference class of past outcomes. An overreliance on base rates can lead to faulty forecasts if the statistical properties of a reference class change over time. That said, we believe that forecasters don’t use base rates as frequently as they should.

Companies grow by generating a return on investment. The nature of investment has changed markedly in recent decades, from one dominated by tangible assets to one mostly in the form of intangible assets. Intangible assets have some characteristics that distinguish them from tangible assets, including greater potential economies of scale and higher risk of obsolescence. The good news is that intangible-intensive companies can grow faster than their tangible counterparts. The bad news is they can also become irrelevant and shrink fast.

As a consequence, we should see two effects in the data: higher growth and more dispersion in the outcomes.

Our analysis of the results from companies in the Russell 3000 from 1984-2020 reveals both of these. The base rate of sales growth is getting stretched from the average in both the positive and negative direction.

There are two main lessons for investors. First, it is important to be mindful of the potential shift in the base rate as the result of the rise of intangibles. Second, skillful investors may be able to identify the companies that will grow faster than expected, hence providing the potential for attractive returns.

You can read the entire paper here:


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