A little over a year ago, Geoff Gannon wrote a post where he gave readers the salient financial information of company, but didn't give the ticker/name of the company. He then had readers guess the stock price. It was an amazing little experiment derived from a quote of Warren Buffett where WEB goes on to say he likes to guess the stock price before looking at the actual price when he analyzes investments.
As always, WEB was well ahead of his time. Much work and study from behavioral finance/economics, like that of Daniel Kahneman, had discusses the effects anchoring has on each of us. If we see a stock price before valuing the company, we will unconsciously fix our valuation near the actual price.
Ever since Geoff's original post I have been fascinated by the experiment. I even went as far as making an Excel program that would randomly generate ticker from the Russell 3000, display the financial information with ticker and price hidden. I could then go about valuing the company and check my work to see how I was doing. Here are three takeaways from probably doing this a couple thousand times in the past year:
- There are many companies out there that I did not know existed. While very few were "cheap" per se, it felt like a healthy change from names you hear about every day on the press or in the value investing community
- I have improved my valuation skills
- I can feel the bias in stocks that are easily dismissed. For instance, the for profit education sector screens amazing well (i.e. I guess the stock price substantially higher than the actual trading level). This is similar to some of the stocks spit out by Joel Greenblatt's Magic Formula.
(You will note I have added a number of line items from Geoff's original exercise)
I have not looked at the ticker or stock price. The first few things I would notice:
- Sales and earnings are growing very quickly
- Dividends have come down
- Lots of free cash flow. Scalable business with essentially flat capex in the last few years along with growth
- Industry: Hard to tell. Not a utility or a REIT. Definitely asset light, working capital heavy (people)