Michael Mauboussin: Investors Should Always Compare Opportunities With Appropriate References

During his recent interview with Tim Ferriss, Michael Mauboussin explained why investors should always consider comparing opportunities with appropriate references. Here’s an excerpt from the interview:

Mauboussin: But the broader lesson is that no matter what you’re thinking of doing, moving to a new city, taking a new job, anything you’re thinking about doing is asking, Is there an appropriate reference class? Is there a base rate that I can look at to see if I can get some information about… a little bit about my prospects?

Where we spent a lot of time on this for example things like corporate performance, right. So I know that you do a little bit of investing as well, but questions like, “If a company has sales of a billion dollars, what’s the distribution of growth rates I should expect? Right.”

Let’s look at history to figure out how good could it be, how bad could it be, what’s the average, then where do I think my company’s going to fall within this distribution, and how optimistic or pessimistic it might be.

You can listen to the entire discussion here: