Geometric Mean is a Superior Measure than Arithmetic Mean
Geometric mean penalizes volatility
Earning Growth Rate
| Company A | Company B | |
| 10% | 10% | |
| 20% | 5% | |
| 30% | 50% | |
| 40% | 10% | |
| 50% | 75% | |
| Arithmetic Mean | 30% | 30% |
| Geometric Mean | 26% | 18% |
Apparently value investors want a rather "stable" or "predictable" company. To quantify it, I think using geometric mean to check growth rates could be a good start.
Don't be fooled by the "nice-looking" arithmetic mean ! Sometimes it's not as good looking as it suggests.
