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Do you think about probabilities on each and every trade you make? You should.
A football analyst can tell you the probability that a team scores after entering the red zone.
Baseball analysts will tell you with certainty the percentage of times that a catcher throws someone out at second base.
Why? Because these probabilities matter and they are easy to figure out. They simply look at the data that is presented to them.
So, why is it that when I read a research report from a financial analyst they can’t just simply tell me the likelihood that a stock will meet their expected price target?
Instead, the actual “pros” in the stock picking business give you a buy target, but no probability that the target will actually get hit. That’s amazing to me.
The analysis coming out of Wall Street’s best has nothing to do with the actual likelihood of success! Wall Street analysts are little better than Vegas bookies.
I’m simply not interested in analyst estimates. And if you want to make money in the markets, I think you’d be best advised to ignore analysts. That’s because a price target is just a guess in my opinion. And I’m not interested in guesses.
I want to hear that the statistical chance of the stock going to $19 is X%, the chance of the stock going to $19 in three months is Y% or the chance the stock moves lower over the course of the next year is Z%.
Confused? Let me explain, because after I do you will never look at an analyst’s price target the same.
Probability of a Stock Touching a Specific Price
Apple (NASDAQ: AAPL) closed Monday trading at $117.75.
And yet, 42 of the most well-respected Wall Street analysts have a mean target of $148.64 for the stock, with a high target of $200.
So, how realistic are the professional analysts’ price targets? Let me show you what the actual market expects.
As you can see below, the probability of Apple touching $148.64 in the next 25 days is 0.71%.
In the next 88 days, the probability of Apple touching $148.64 is 5.54%.
In the next 207 days, the probability of Apple touching $148.64 is 16.13%.
In the next 424 days, the probability of Apple touching $148.64 is 34.92%.
As for Apple touching the high target of $200? Well, the market doesn’t even register a probability right now.
So as you can see, the probability of Apple successfully reaching $148.64 over the course of the next year or so is not very high, yet most of the professional Wall Street analysts are predicting such a move with little regard for the statistics.
Why would you ever buy a stock based on an analyst’s price target that has a chance of success of only 35%, 5% or even 1%? It’s pure insanity. Yet, this is how the majority of people invest their money – blindly listening to Wall Street predictions that do not make any sense.
The reason I focus on probabilities of success so much is because it is truly what investing is about. It is the edge that gives self-directed investors the ability to become far better investors than their professional counterparts.
One day I would love to hear an analyst on CNBC actually state that the reason he is predicting a stock will move to a certain price is because it has a probability of success that is actually greater than 50%.
If you’d like to learn more about a trading system that use statistical probabilities on each and every trade, please click here.