Hindsight and Survival Biases in the Market

Hindsight Bias

Reinforcing (or rather generating) our opinions “a posteriori” that is, after an event occurs, or knowing the outcome. In this sense one usually ascribes a greater predictive power, and consider that some event happened in the only way that it could have happened.

“I always knew that this stock would surge, it was obvious, and if you see all those indicators it was a very clear and logical outcome.”

Survival Bias

How many times have we not heard stories of companies that were on the verge of extinction to resurface? It seems that the market is full of these inspiring triumphs, but who documents the cases of companies that, being close to the abyss, simply fell down the cliff?

“History is written by the victors”

Winston Churchill.

I consider that documenting the cases in which titanic efforts have managed to get companies to resume their course, serves as a guide, inspiration, and example. But it is necessary to have the complete picture when trying to calculate your real odds with historical information.

Check a list of all the companies that are currently worth 20 times or more than their minimums after the dot-com bubble burst back in 2000 … the list of those companies that didn’t make it probably lives in oblivion.

David Gardner — one of the founders of The Motley Fool — has commented that when studying companies he wonders if they would pass his snap test.

If with a snap of our fingers we caused a company (with all its products or services) to disappear overnight, would people notice it the next day, would people care?

This methodology is an approach that takes us to a philosophical level, to a sense of transcendence, of the relevance of a founder’s vision in the day to day of their users or clients.

Without going too far, about 10 years ago we would not have conceived a world without Kodak, Blockbuster, or Toys R Us, the reality is that for various reasons today they are no longer with us.

The digital transformation of photography ended with the first company. The spite, courage, tenacity, and vision of Reed Hastings, as well as the evolution of technology, buried Blockbuster. Finally, changes in the preferences of the general public, as well as lack of agility and adaptation by the administration were the executioners of the famous toy store.

But, where would a fatal snap come from?

The real “snap” is the manifestation in the results of the company, the decomposition of its fundamentals. Sometimes it occurs untimely, in others, the end is anticipated.

The questions we must ask ourselves are: will this company be able to continue operating next year? how many quarters can it survive with its current cash? how fragile is its model?

The fact that a specific company ceases to exist does not mean that the demand for a certain need that it fulfills has vanished as well. It is interesting in these cases to find out who will be the beneficiary.

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