How to figure out how confident is someone of their stock suggestion?
As a follow up of the post https://neyinvesting.blogspot.com/2015/04/how-much-of-stock-should-i-buy.html
How to figure out how confident is someone of their stock suggestion?
Maybe you are interviewing someone, following a news letter with stock tips, or just watching investment that the gurus made on tv.
Here is a good rule of thumb that works for me.
I created a matrix to figure out as a rule of thumb the confidence of someone in their investment, bet, idea... according to the size of a position:
Quick explanation of the picture bellow:
1) Never mind the formulas of the left that's explained in detail on the other post.
2) this matrix has a risk reward ratio, for example if you think you can double you initial bet, then you have a 2 risk on reward ratio. 100% risk divided by the 200% reward. a 10 risk reward means you expect the investment to go up 10 times.
3) the other axis is winning probability. if some one tell you they think the investment will go up 3 times (3 Risk reward ratio) and that investment is 10% of their portfolio, you just go to the matrix. column 3, and find the closes number to 10 (blue numbers in the middle of the matrix represent position size in %).
You would find that implies a 40% win probability.
4) I painted in dark green the position size boxes under 40%, because is weird to hear someone investing that much of their portfolio in 1 position.
Things get a little more complicated when you add cost of opportunity and time into the equation so I just stick to the first matrix
here is the example of a matrix with those parameters added, so you can have an idea
