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The Equitymaster Research Digest

Research Team's Big Dilemma, Upcoming Recommendation, and More...
Oct 23, 2015

Imagine you are planning a picnic. You are worried it might rain, so you check the forecast. You're relieved to learn there's only a 10% chance of rain. Will you take the chance and have the picnic? I think so. You wouldn't want to spoil your family's fun for such a small possibility of rains.

Let's add a twist to the story. Just as you are stepping out, storm clouds gather. What will you do now? Will you still proceed?

Well, it will all depend on which of the two factors give you a better decision making ability? If you give more weight to the weather on that particular day, cancellation seems like a good option. But if you think since it rains only 10% of the time this time of the year and clouds don't mean much, you will go ahead with your plans.

If I were you, I think I would cancel my plans. Weather forecasting may not be an exact science but is close, and clouds usually lead to rains. So it probably makes sense to stay indoors.

Let's turn to investing

With this thought experiment in mind, let's move over to investing. Now, imagine there's a company that decides to enter a very cut-throat industry. So cut throat that no player has been able to make profits for a sustained period of time. In fact, the industry is world-renowned for the shareholder wealth it has destroyed over the years.

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