Conservative Estimates

Warning. I’m about to use a dangerous word: Conservative. Oops. Let me dial that down by taking off the capitalization: conservative. No, this isn’t about politics or conservation, though there are ironies there for volumes. I’m writing about conservative estimates and their attendant companions, assumptions. The topic comes up frequently, but the adjective is disregarded while the second word is taken as an absolute. Life and the world aren’t that certain. Conservative versus non-conservative estimates are probably about to become more important, and I’d rather make the distinction now than in the middle of an event. Besides, paying attention to conservative estimates in the news changes the news.

I’ll dive straight into stocks, and I’ll use that storied, lingering drama that is MVIS, MicroVision, to hopefully make a point or two.

One of the most commonly quoted estimates within stock investing is that, in the long term, stocks can return about 7% per year. That’s a conservative estimate. There will be big swings up and down daily and over a year, maybe not in your investments, but in someone’s. Pull together a ‘representative portfolio’ and it can be up 51% or down 37% in a year. The 7% number comes about from a communal acceptance that over decades the highs and lows balance out to about 7%. Even for the ‘representative portfolio’ though, twenty years of investing can produce a range of 6% to 18%. So, if you are investing for the long term, 7% is a relatively conservative number. People use that for planning so they don’t get overly enthusiastic and start spending beyond their means. It is a good, easy number to work from.

(from Proactive Investors)

Look at that chart again. It is wise enough to show a range of data for every period. I don’t have the database to run the statistical analysis, but it is reasonable to assume that while 6% or 7% are conservative, and 18% is aggressive, that somewhere in the middle is a nominal value. I wouldn’t be surprised to learn that a financial advisor or analyst is gritting their teeth, throwing things at the screen, or deciding not to read any more of this post. I can’t blame them. Generalizations based on statistics are only generally right, which also means they are too frequently wrong.

The conservative number is rarely correct. The nominal number is most likely to be near the eventual result. If the data fits a nice, theoretical normal distribution (a bell curve), then the aggressive answer is as likely as the conservative answer. The difference makes a difference. Invest $10,000 at 6% and end up with about $32,000 after twenty years. Invest $10,000 at 18% and end up with about $274,000 after twenty years. Great! But wait. While it looks like investing can at least triple your money in two decades, or maybe even let it grow 27-fold, reality is that the downside is a possible 100% loss and the upside is the stuff that gets people on the covers of magazines.

With that range of uncertainty, people become comfortably retired, destitute, or wealthy beyond dreams. Each of those possibilities becomes real for someone. I’ve witnessed a lot of that range. I know.

MicroVision is attracting a lot of attention. There’s a crowd of investors who’ve followed and owned the company for over a decade, but it is a very tiny crowd considering the size of the investing community. Recent product launches by CelluonIMG_0417, and mentions in patents and products by Sony, Microsoft, Apple, and others means there is a lot of possible potential; but the news is so new that there’s very little data to work from. The next conference call, or a customer’s product launch could put some solid numbers to the estimates of future revenues and profits, but some investors don’t want to wait until after the news hits. They want to profit by buying early and low, and selling high later, hopefully. I know that myself and other investors are beginning to field calls from people wanting estimates of the timing, share price, revenues, and profits. Estimates are out there, but there’s more assumption that certainty behind the analyses.

Conservatively, how conservative do you want to be? What assumptions do you want to make? If you assume that a small startup with a troubled history and an unproven technology is unlikely to produce a profit, then your conservative estimate is that the company will go bankrupt. If you assume a small startup with a disruptive technology that has cleared almost all of the apparent hurdles can succeed as well as cellphone cameras or tablet computers, then it becomes reasonable to make guesses (but call them estimates) about profit per piece, market capture, technology expansion and find yourself looking at numbers that are incredibly large. Between the worst case and the best case is a more moderate set of assumptions. Take one aspect of the technology, assume one product introduction, pick a moderate number for profit and market capture, and see what results. The only thing you can know for sure is that the real answer will probably be something else; but, is your level of conservatism sufficient to convince you to buy or sell?

At the 2014 Annual Stockholders Meeting, the Chairman of the Board alluded to an expected similarity between MicroVision’s products and embedded cellphone cameras. Based on what he said and adding data from other sources, it was reasonable to estimate (guess with math) that MVIS could be worth $33 in 2015, $178 in 2017, $667 in 2020, and $3,333 in 2023. If the technology is accepted similarly. If the Price to Sale ratio for such a disruptive technology would be about 10 (my guess). If, if, if. Head over to PetersMVIS blog for a collection of valuations. Some use completely different assumptions and analyses and get surprisingly similar results. Dive into the discussion boards, however, and find different interpretations of conservative.  For a stock that is trading around $3, some consider it unconservative to assume anything more than $6 by the end of the year, getting closer to the numbers from the general chart above.

Would I cheer MVIS at $3,333? Of course. Note that my estimate made that a 2023 number. Do I suspect it will happen? Probably not. At that price and for the current number of shares, that would give MVIS a market cap of about $161B. Out of the thousands of publicly traded companies, only 56 are larger. It is possible, but that scarcity suggests it isn’t conservative. So, if it only goes to $333 is that conservative? We will only know in retrospect.

Investors can collect horrific and glorious stories. Before the dramatic moments hit there were years of doubt. After the event it seems obvious why Enron evaporated and Apple dominated. There were many that guessed right, and may have had analyses to support their assertion; but there were probably just as many that were  just as certain that guessed wrong.

Within stock investing there are many words for conservative, nominal, and aggressive. I can’t know what matters to you. What matters to me is balancing the realization of the range of possibilities. Is this where I want to, or need to, place my money? Am I being too risky, or too conservative, or just about right? We won’t know until the end – though I also know I’ll hear lots of opinions in the meantime. Hey, that’s investing.

The news applies the term conservative to many things outside politics: estimates of federal budgets, climate change, markets, the economy, population growth, and energy usage. When I hear the word conservative, I want to hear the whole story; best case, worst case, and something in the middle. I know that none of them will be right, but knowing all of them is far better than assuming only one of them is real.

About Tom Trimbath

consultant / entrepreneur / writer / photographer / speaker / aerospace engineer / semi-semi-retired More info at: and at my amazon author page:
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One Response to Conservative Estimates

  1. ideaworth says:

    Nice blog, with good explanations of estimating future stock values and also that the standard deviation is large.

    Love the chart. A picture really is worth a thousand words

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