Bloomberg's US Financial Conditions index has loosened to its most accommodative since the 1990s. This measure accounts for money market, corporate and muni spreads, stock values and implied stock and bond volatility.

Let's break down the math again with the exact same context, but this time apply it to the field of investing and why neglecting base rates is one of the top 5 cognitive errors. Let's also assume that you possess a 95% accuracy in your due diligence research (the inside view), while only 1 in every 100 publicly listed companies possesses an economic moat (the outside view, or the base rate). Prior Probability: Only 1 out of every 100 companies without a wide and durable economic moat succeeds in generating excess profits over time and isn't disrupted by competition or substitution risk. False Positives: Out of the 99 companies that will ultimately fail to defend their profits, your 95% accuracy in due diligence research — also known as the inside view — will incorrectly flag about 5 companies as future winners. True Positives: Out of the 1 company that will actually succeed in generating long-term excess profits, the research you perform will correctly flag that 1 company. Total Positive Results: You get about 6 companies flagged as "buys" or "winners" in total, which means 1 true positive plus 5 false positives. So what is the final math? The chance that a positively flagged, moatless company is actually the rare true compounder is (1/6), which is about 16.7%. Stated differently, even with a highly accurate research skill (superior selection), the overwhelming base rate of failure for moatless companies means the vast majority of your "buy" signals will still be value traps.