Musings – Conditions & Sample Size

Bertrand Russell said, “The man who has fed the chicken every day throughout its life at last wrings its neck instead.” The past is often a good guide to the future, but not always.

One needs to evaluate changes in conditions before using past evidence to predict likely future outcomes.

As Warren Buffett said, “Conditions relating to Technology and Human behaviour and can make the future a lot different than the past”.

With the advent of internet and technology, the future of retail has gravitated towards Amazon; billions of dollars of market value have migrated from the traditional brick-and-mortar retailers like Walmart and Sears to the likes of Alibaba and Amazon.

Human behaviour takes time to evolve and customer priorities change over time. As the families got nuclear, customer priorities shifted to convenience, delivery at doorstep, quicker turnarounds (in some cases, same day delivery to as quick as hourly delivery) and obviously, low prices. The joy of going out as a family to shop has now got transcended to online shopping at the convenience of people’s homes.

Companies (FAANG – Facebook, Amazon, Apple, Netflix, Google and Netflix) which were able to cater to some of these customer priorities were able to capture significant market value.

Sample size plays a very important role. Small sample size has no predictive value. Advertisements often induce the prospective customer by quoting something like this: “80% of the dentists recommend this product.” Now, this does not take into consideration the same size. If the same size were 10 dentists of which 8 recommended a product, it could simply alter the feasibility of the study. Small sample sizes may alter our decision, since they do not represent the reality and could be subject to (mis)influence.

Hence, it is important that in order to determine the investment potential of an investment, it is important that you look at least 10 to 15 years of historical financial data. Looking at merely 3 to 5-year historical data could lead to biased data-points, thereby lead to erroneous decisions. If, one was to look at infrastructure related financial information during 2003-07, everything looked green and rosy; however, if one were to look at historical data-points, one would have realized his fallacy in their investment judgement.

Disclaimer: Please note that these are my personal views. While, I am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action. 

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