What’s YOUR Probability of Success?
In the first year of my MBA program, I had to take a course on statistics and probability. I still remember how much I hated that class.
Flipping coins was the first assignment. Flip a quarter a hundred times and see how many times you get heads and how many times you get tails! Ugh.
Then came the tables. At the time, I thought it was likely the worst class I would ever have to endure. Little did I know, it was the class that would end up playing the biggest part in my investing career. To this day, what I learned in that class matters more than just about anything else I learned in college when it comes to investing.
I now look at investing as a series of probabilities. How likely is this trade to succeed? That is the cornerstone of my decision making.
It doesn’t always have to be about numbers. There are qualitative issues as well, such as…
- How good is the management team?
- Does the company dominate a market?
- What’s the trend in the industry?
Then come the numbers. What’s the company’s…
- Debt-to-equity ratio?
- Debt-to-cash ratio?
- Earnings growth?
- Book value as compared to peers?
The list is endless. But each factor has to be considered in order to estimate how successful a trade will be. And of course, along with the probability of success, I have to consider the probability of failure – plus what the consequences of failure would be and how to mitigate them.
When you start to think in this way, you will become a more successful investor.
This week, War Room members closed out another put sell. This one was on Vistra Corp. (NYSE: VST).
Closed 2 weeks ago at $0.59 for +76%. – Tonywdcvr
In at $0.96, out at $0.65 for a 32.3% winner. Thanks, Karim. – Ronald D.
VST 1 contract closed at $0.64 for a 43% gain. – Edwin G.
For put sells, I actually use a probability calculator. It is the LAST thing I check before I issue a trade. A play has to fall within an acceptable range of success for me to recommend it. That is how my put-selling win rate is above 95%. I expect to win only 80% of the time, but this market has been great for put sellers.
Before I get to the probability calculator, I go through the exercise of looking at the factors I just mentioned. Any calculator can spit out a number based on the inputs. What a calculator cannot do is measure the qualitative or subjective factors.
Action Plan: If you want to avoid the “homework,” join us in The War Room, where we do all this work for you. Yes, we will have losers sometimes, but you can bet that we have not maintained a 76.30% win rate since inception by not having the likelihood of success on our side! Click here to join today!
FUN FACT FRIDAY: The short squeeze trade is back in action. Meme stock traders have refocused their energy on sticking it to short sellers in recent weeks. The 50 highest short interest stocks have seen accelerated gains as a result. The trading revolutions continues…