Why Concentrating On Just The Averages Obscures True Market Insights

By Jacob L. Taylor and Lonnie J. of Farnam Investments

“If you’re a basketball coach, you’re probably not going to arbitrarily hire a 5’6? player. You know there may be exceptions, but in general, you’re looking for a 7-footer.”

-- Warren E. Buffett

The average male human is 5'8" tall; most people fall somewhere close to that average. The average NBA player is 6'7" tall, which is obviously a quite rare height for a human.

During an average year, with average market prices, a typical company will sell for 15 times last year’s earnings. So a 15x multiple equates to 5’8” on this normal distribution. Benjamin Graham, the father of value investing and...