In our experience, yes: It protects us from asymmetric skewing.
It is of a union between projections of future value and bias that asymmetric skewing is born.
What is an estimation error?
An estimation error is the difference between an estimated value and the actual probabilistic value.
Most estimation errors that we run into are products of handicapping. Let’s use Denison Mines as an example.
We use a period of 23 Years in order to calculate Benchmark Odds against which to measure Denison’s Implied Odds. Without the Benchmarks, we would not be able to determine the presence of value.
| PRICE | BENCHMARK ODDS | ODDS | VALUE | Implied Probability |
| 0.61 | 17/6 | 5/1 | No | 16.67% |
| 0.52 | 12/11 | 2/1 | No | 33.33% |
| 0.46 | 4/19 | 1/2 | No | 66.67% |
As you can see, we don’t have any long value bets staring us in the face, but even so, the odds of rising to 0.46 in 2020 are quite good — 66.67%.
Interestingly, that’s not far off the mark of Denison’s intrinsic value at $24.70/lb. U308, which we’ve estimated at 0.41. So it looks like, from a fundamental standpoint, shares can be picked up today at a 11% discount.
That’s great, but where are the estimation errors?
The big estimation errors occur when an estimate of future value is calculated. For instance, take Denison’s valuation at $30/lb. U308. At $30, we think Denison is worth 0.49/share. And if somehow, by some miracle, spot uranium popped to that level, Denison would have a 33.33% chance of rising to its calculated valuation.
Your own estimation errors have convinced you that your betting odds are considerably better than they actually are.
But the market is stubborn. It simply will not revalue a stock in concordance with your projections. And it is of a union between projections of future value and bias that asymmetric skewing is born. In other words, your own estimation errors have convinced you that your betting odds are considerably better than they actually are.
The odds matter…
| PRICE | BENCHMARK ODDS | ODDS | VALUE | IMPLIED PROBABILITY |
| 0.37 | 7/16 | 1/2 | No | 66.67% |
| 0.31 | 14/9 | 3/1 | No | 25.00% |
Here’s another consequence of estimation errors: You miss out on the value bets* that intersect with good odds.
*The 0.37 price point was so tantalizingly close to representing a short value bet at great odds, that it would have been a shame for a value bettor to pass up (Note: It wasn’t passed up, obviously.)
Part V: Exits
