Constantly on the look out for +EV situations.
“Expected value”: you multiply each potential outcome by its probability, sum the results, and select the path with the highest total. But while expected value represents the probability-weighted average of all possible outcomes, we can be certain it will not be the outcome (unless by coincidence it’s one of the possibilities). Clearly just one of the many things that can happen will happen – not the average of all of them. And if some of the paths under consideration include individual outcomes that are absolutely unacceptable, we might not be able to choose on the basis of the highest expected value. We may have to shun the quantitatively optimal path in order to avoid the possibility of an extreme negative outcome. I always say I have no interest in being a skydiver who’s successful 95% of the time.
Investment performance (like life in general) is a lot like choosing a lottery winner by pulling one ticket from a bowlful. The process through which the winning ticket is chosen can be influenced by physical processes, and also by randomness. But it never amounts to anything but one ticket picked from among many. Superior investors have a better sense for what’s in the bowl, and thus for whether it’s worth buying a ticket in a lottery. But even they don’t know for sure which one will be chosen. Lesser investors have less of a sense for the probability distribution and for whether the likelihood of winning the prize compensates for the risk that the cost of the ticket will be lost.-Howard Marks
Contact: george [at] evbettor [dot] com