The Power of Prediction
Democratizing estimates and getting paid for it
For those of you who follow me on Twitter you may have seen my recent announcement of a Q1 2024 earnings competition. If not, or if you have and are wondering why I’m giving away money for something as simple as predicting revenue, this article is for you. There is no stock pitch contained within, simply an interesting project I’d enjoy some help with.
My reader base spans from seasoned professional PM’s managing >$1b in AUM to college students looking to learn more about the industry. As a result not every article will be for every reader and this one naturally skews towards those with less experience, but I hope the idea is interesting at least to all. Let’s get to it.
Clarity Markets: Take A Guess
As you may have remembered, last quarter I tried to do a similar paid competition via Google forms wherein users guessed revenue and the best guesser would get $100. Unfortunately, Google forms was not keen on recording entries so no winner could be declared. This time around we’re doing it a bit differently via Clarity Markets, a website made with the help of a software dev friend and Google Gemini.
I do kindly ask any and all readers to head to Clarity Markets and submit estimates. All you are asked for is to guess Q1 2024 revenue at Mag-7 or CDLX/CVNA with paid prizes up to $700 for an individual if you are particularly savvy. There are specific bonuses for CDLX and CVNA if Mag-7 estimates are too daunting. It takes about 2 minutes to submit the estimates and you might get a shoutout on Twitter in addition to the money if you’re so inclined. Additionally, feel free to blow my AWS costs out of the water by sharing the competition as much as you’d like. The prize pool increases with participation as well! With that being said, let’s explain why I’m giving away money for such little investment on your part.
Clarity Markets: Why though?
As many of you may know, the current sell side model is not particularly retail friendly. I challenge my solo investing readers to go find consensus revenue or EPS for GOOGL’s Q1 2024 ahead of time for free, it’s quite difficult. Given GOOGL also does not guide to near term revenue, for the average investor it can be quite hard to know what to expect going into earnings, and that’s before even bringing in the difference between sell side estimates and buy side expectations.
Clarity Markets in that case aims to provide some clarity (haha) to users. I have generally high faith in my reader base, so if some smart individuals submit good estimates, there would be an open source of both analyst consensus and your own buy side expectations.
For some companies, guidance can be quite wide with analyst consensus being quite stale or outright incorrect at time of earnings. CVNA is a notorious one here with inexact guides and sell side coverage that can barely put together a legible model. As a result, unit sold estimates can be off by 5-10% depending on the sell side report while being known to savvy current investors via the likes of Yipit or Alternative Alpha or other such platforms. Given CVNA sells pretty much exclusively cars, this can contribute to significant earnings volatility, where savvy investors have an info advantage over the rest of the world.
In theory, Clarity Markets users would be directly financially incentivized to have good and up to date predictions as well as visibility into estimate discrepancies. If users estimate 91k CVNA units in Q1 but sell side estimates 87k, maybe there’s something to that discrepancy that can produce alpha?
Some of the best analysis available is nowhere near an investment bank sell side desk.
compared to the average CDLX analyst is like comparing the encyclopedia to a picture book. Analysts have very wide ranges of coverage on often dissimilar companies which frequently leaves small and mid caps both underfollowed and poorly followed.My intuition is that quite a few readers can do very good analysis on companies if they so desire. As a result Clarity Markets would act as a hub for better estimates than from the sell side, with more frequent updates and full visibility. All while getting paid to do so!
KPI coverage is generally quite expensive! The business model of a Yipit for example is quite simple - spend $1m on a bunch of credit card panels, get data for 20 companies, sell coverage for $20k per company to hedge funds. The incremental margin is basically 100% while totally inaccessible to general investors.
While currently we just ask users to submit revenue estimates, what if we ask for CVNA Unit Sold estimates? Users could have an info source not reliant upon spending $20k for coverage of their position, something that can make sense when measuring in the 10’s of millions but probably not in the 10’s of thousands.
A track record is a holy grail in investing, yet quite hard to generate, especially on an analysis basis instead of a results one. A great model with bang on assumptions from an analyst isn’t going to just be exported to a prospective new employer.
Clarity Markets could be used as a repository for your great ability to estimate KPI’s and financials. Eventually the idea would be to have coverage beyond just the next quarter so you don’t have to be too short term focused, but having an easily exportable proof of you being better than consensus might help those looking to get into a new seat.
There are a multitude of other reasons why I think this experiment could be quite interesting, hence my decision to fund some prize money to incentivize participation. I get absolutely nothing out of it currently besides sating my own curiosity!
The main limiter in learning from this experiment is scale of participation. As a result any likes/shares would be appreciated, both here or on Twitter.
Additionally if the idea sounds interesting and you’d like to more directly participate in funding, feel free to reach out! While early in iteration the hope is to get meaningful coverage of most US listed stocks and democratize financial information access for investors of all types, all while paying them to do so. Kind of like play-to-earn crypto, but not a ponzi scheme. The end goal is so everyone spends a bit less time looking like this guy after an earnings report.
Cheers