On Case Studies

I have a case study of a perfect stock trade where I made 3x my money in three years. It had it all: Mr. Market offered a discount relative to growth and earnings power. I had an analytical edge, plus the temperament of a monk. It was also a micro-cap company where the markets are (probably) less efficient.

The market for this company (ticker: PETS) was growing and is large. American’s spend over $70B a year on pets. The company was in my circle of competence, and it’s business had a moat. In ten years this company would be doing better than today. Check. Management was forthright and allocated capital well. Another check.

I could write a lengthy report on this trade, one with fancy charts, forecasts, and a detailed ex-post analysis of betas, alphas, and other Greeks. The dollar and percentage gains were solid. But is it replicable? If the time frame is short, and if I’m only showing you one case study, it could be luck. But if lay out all my stock picks over 10 years and show the gains relative to the market, it becomes more convincing (the answer on the track record, in case you’re curious, happens to be a resounding but unverified outperformance).

To show a single report, or case study is clearly flawed, yet allowed. When in doubt, highlight only the best pick(s) and keep the rest silent. This is the norm in many domains. It often even has the seal of approval from an outside expert, who’s paid a lot of money to say that it’s a reasonable estimate. But if you’re a buyer, ask for the full track record, book-of-business or industry cohort, unvarnished and most importantly, understandable to my curious sixth grader.

It’s ok if you don’t change the world. It’s ok if you’re not truly disrupting a $3T market. It’s ok if you don’t pretend to change all that’s wrong with healthcare. It’s ok that you can’t do anything about the undersupply of physicians in America. It’s ok to recognize that healthcare is not a normal good and won’t be shopped for like a car (mostly ’cause we only pay ~15% of the total out-of-pocket, or variable costs). But we should all demand transparency in storytelling and accept the natural limits to the problems at hand. An old Chinese proverb, or so the Internet tells me, says: “the beginning of wisdom is to call things by their right names.” If vendors don’t share the big picture with reasonable ranges that pass simple plausibility tests, we know the numbers are fishy and how all the other untold case studies really turned out. To be polite: they’re not calling things by their right names. We know their portfolio stinks.

Photo by Ben White on Unsplash


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