George S. Chua l May 8, 2024 l Business Mirror
ANY rational person would like to have the odds in his favor all the time and the odds of a particular event happening is something that can often be a statistical matter. For example, in flipping a coin and guessing if it will be heads of tails, there is a 50-percent chance it will be heads and a 50-percent chance that it will be tails, after all there are only two possible outcomes. Similarly, the probability of one dice being a particular number from one to six, is one in six or 16.6666 percent per number.
How does one apply this to practical use? You can probably determine most likely outcomes in the equities markets by looking at the opinions of analysts on their stock price forecasts. In its simplest form, the question to ask is should one buy, sell or hold the stock. As an example, let us take a look at Tesla (TSLA), where 32 analysts have come up with their recommendations with 7 Buy, 16 Hold and 9 Sell. Obviously, the consensus recommendation is a Hold. The highest analyst price target is $310, average price target is $171.99 and the lowest price forecast is $22.86, to get the weighted average price let us make some simplified assumptions that the 7 Buy analysts forecasted a price of $310, 16 Hold analysts are looking at $171.99 and the 9 Sell analysts are at $22.86. The weighted average price forecast is $160.24.
While other factors need to be considered. I would use the $160.24 as a guide or point of indifference where below that price I would consider buying and a price above is a sell opportunity. Of course, analysts can change their minds at any time but it is better than working with nothing. Odds become more stable with more numbers of attempts. As an example, flipping a coin twice will not always result in heads appearing once and tails appearing once as well. It is conceivable that you could flip it ten times and you could get ten heads in a row or ten tails in a row. However, over numerous flips such as 100,000 times you can see that it will be closer to 50/50. Therefore, you should also consider the frequency of the transaction.
Many companies do this kind of promo such as soda companies offering prizes for bottle caps with certain winning numbers or designs. Since the soda company controls how many bottle caps are the winner, they control the cost of the prizes to be given away. This works the same way with scratch and win games, where the winning numbers are already predetermined. How would you put the odds in your favor? In lotto, perhaps waiting for the jackpot to be really large may improve your risk reward ratio. In other promos where the winning “ticket” is in the product, you increase your chances of winning as the “contest” period comes to a close. There is a logical reason for this, as an example, if a company decided to run the promo contest over a period of six months, it will become meaningless if the grand prize was won on the first day!
Holding period is another consideration in putting the odds in your favor. If you have excess money that you do not need for two years, you can easily buy a 2-year bond and live with the interest until the maturity. On the other hand, it would be catastrophic if you need the funds in 6 months and buy a 2-year bond because the interest yield on the 6-month paper is 3 percent while the 2-year note gives a 3.5-percent interest rate. What do you think happens if during this time the interest rates skyrockets? You will have to sell your note at a loss since the market will adjust for the higher rate by asking for a discount on the face value of the note. Putting the odds in your favor is a matter of knowing what you are doing.
*** The views and comments of Dr. George S. Chua are his own and not of the newspaper or FINEX. The author was 2016 FINEX President, 2010 to 2020 FPI President, an active entrepreneur in fintech, broadcast, media, telecommunications, properties and a regular member of the National Press Club. Dr. Chua is also a Professorial Lecturer 2 at the University of the Philippines Diliman and BGC Campus, a Trustee of the FINEX Foundation and the Vice Chairman of the Market Governance Board of the Philippine Dealing and Exchange Corp.. Comments may be sent to georgechuaph@yahoo.com or gschua@up.edu.ph.