Thinking in bets

For the past two weeks, I analyzed the auto-insurance industry to better understand a business that I have been following, Root.

I'm not sure yet if I'm going to invest in Root or not. I have to look at it again with all the new knowledge I have gathered from the competitors.

Whatever my decision be, this study taught me a few things about thinking in bets.

Any investment you're making is essentially a bet that the price you paid will be higher in the future. The insurance business is nothing but the quantification of risk based on millions of datapoints collected. But when it comes to investing, very often these datapoint are hidden, or rather, there are too many hidden variables that you cannot properly quantify. That's why it is important to invest only in companies that are in your circle of competence so that you're not left with surprises.

There are always going to be surprises. You will get lucky or unlucky. What matters is that you are able to make estimates of the probabilities of events affecting the business and the weight of the outcome on it.

We can say than there is a nearly 100% probability that on average more money will be spent traveling in 20 years than today and much of this money will be online.

But can we say with near 100% accuracy that the market share of Booking Holdings will keep increasing? Nope. Maybe 90%. You must find different scenarios that will either increase or decrease the market share and estimate how probable they are.

Some events will be more impactful than others. Will AI affect Booking Holdings business? Yes, the probability is high, 95% maybe. But will the impact be that big on earnings? I don't think so. Even if the probability is big, the weight is not that big.

Unfortunately, the future will always be uncertain and that's why the price you pay matters.

When the stock price of Microsoft peaked during the Dotcom bubble and then crashed by 75% and only recovered after 16 years, the revenue of the company did not stop growing. The company was always profitable.

This post is also inspired by a book I'm currently reading, How do decide by Annie Duke. I read her book, Thinking in bets a few years ago and it has been helpful in me making my investments.

Full post on my Investment Community: https://nas.io/ishfaaqpeerally/feed/kceg