Defying Base Rates

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In their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discuss Defying Base Rates. Here’s an excerpt from the episode:

Bill: I just think with base rates, I really think it’s got to be contextualized and especially, when you overlay the idea of such a few amount of securities generating most of the return in the market. I just don’t really think base rates apply to things like Google. You know what, that’s famous last words. But I think that looking at Google and saying base rates apply is looking at Albert Pujols when he’s 25 and saying. Well, he’s got about 250 eventually. It’s true, after his whole career.

Tobias: You think–

Jake: Yeah, but okay. Let’s try that analogy a little bit farther and do you sign Pujols to that 15-year contract-

Bill: Look, this is what I think I know.

Jake: -which is a little bit of what some people [crosstalk] were under writing long-term cash flows.

Bill: I think I know that if you consistently try to avoid Albert Pujols, you go out there with a bunch of average players. If I’m going to go out there with a bunch of average players, I’m turning it all over to a computer. Because I don’t see what discretionary edge comes in picking a bucket of value stocks. I absolutely fundamentally don’t see it. I think a computer can do it better. So, for me, I’m looking for the outlier because I think that’s where creativity can actually have an edge.

Jake: Yeah. I don’t think that’s wrong. I mean I think insights can come from those kinds of things for sure that wouldn’t show up quantitatively, necessarily yet.

Bill: Yeah. Look, what would I worry about with Google decreasing market share of search worldwide? I mean, they own 95% of search in a number of countries. If somehow, I thought that search could go away for them, I would be really concerned. If YouTube massively decelerated or lost cultural relevance, I would worry about that. If they stopped investing and things like other bets, I’d worry about that. But it’s not happening in the next five years because the debate is really about 20 years from now. It’s not even about today, or tomorrow, or I mean, if it happens in five years, you ever might as well cut the stock by 70%. I don’t think it’s a high probability event because I think for lack of a better term, the infrastructure of information and I think replicating that is really fucking hard. Apple can try.

Tobias: So, [crosstalk] websites and google.com was on top. One thing that surprised me is Facebook was bigger than Instagram.

Bill: What? Facebook blue?

Tobias: We just did facebook.com.

Bill: On what?

Tobias: It was just a ranking of the biggest websites, and Google was number one, YouTube comes in at three or two, and Facebook was up there, but Facebook was bigger than Instagram. It was just surprised me a little bit.

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