Back in the days of high school I can remember taking some boring math classes while daydreaming and wondering if this will have much use in the "real world". Well, one of the topics covered was probabilities and statistics. It turns out that knowing this is essential for doing well in the market in the long term.
Consider the probability of a coin toss. It can be either heads or tails, so one toss has the probability of 2 possible outcomes, each one being equally weighted. That results in a probability of 50% each for heads or tails.
Simple stuff that everyone who has taken HS should know right? Well, apparently not judging from my recent encounter with a co-worker.
This co-worker was complaining about the market being "stacked" against him and that he'd be better off in Vegas. I tried explaining to him that the odds in the market are much better than the odds in Vegas. The game in Vegas with the best odds is "Roulette" with betting either red or black. The odds are close to 50% but not quite- due to the green "00" on the wheel.
Now I went on to explain the market. Without knowing anything about stocks, you start out with a pure 50% probability of success. How is this so? Well, a stock can either move up or down- 2 possible outcomes. You can make money in each situation depending on whether you short a stock (sell, then buy back) or go long (buy, and later sell).
My co-worker had a hard time understanding this and disagreed with me. He said you had much lower odds of success being in the stock market. How did he get that answer? I'm sure he was basing it on his own lack of market success, which would be the wrong way to go. Going back to the coin toss example - if I tossed the coin 3 times and it came up tails every time, it doesn't change the probability of the next coin toss- which will still be 50% for heads or tails.
Unfortunately the co-worker has personalized his losses and has made the market appear more difficult that it really is. This is where that HS math comes in handy - it keeps you from falling in this trap. That is, if you still remember it.
Once you understand that you start out at 50% odds knowing nothing, you can now greatly increase your odds by applying basic investment knowledge. The key difference between Vegas and Wall Street is that Vegas games are 100% random while the stock market isn't. By analysis you can find market trends that will aid you in deciding where to invest.
Comments (13)
do you think play blind will be a good option?
@ipinkyflower - Lol...in most cases no, but in some cases like that co-worker I talked about- yes!
Playing blind gives you 50% odds, but research can bring it up to 70% or higher.
@SoullFire - hum...maybe not until i try, i see it as gambling which in most cases i play by luck =)
Your co-worker is funny. He seems to only be focusing on the exogenous factors to stock trading instead of the endogenous factors in which he does have control over. I still remember high school math... my math classes were actually fun, maybe it was because of my teachers. But, Calculus was awful because our teacher talked about her life - mostly the negative aspects of it - for the first 15-20 minutes of the class that had no connection to what we needed to know to do our homework and prepare for our AP exam :/.
i should have paid more attention to geometry
@ipinkyflower - Remember, there is a difference between gambling versus investing, so no playing the stock market like the lottery!
@ladyofthesilk - It's not everyday that a comment forces me to check the dictionary.
Hmmm, would you happen to be in the field of biology or chemistry? 
That calc teacher sounds really "special" But wow- you took calc in HS? Nice! I took AP Bio and it nearly killed me.
@Konrado - Geometry comes in VERY handy when doing trendline and chart analysis. Lots of lines and special angles are involved. Who knew?
I abhor math.Right now I'm taking a managerial finance class and (this is a secret so shh; we can't have people thinking that I actually like math now can we?) but I'm actually having fun in the class because a lot of the math is really, really useful in understanding things like financial decisions and the stock market. It's a very useful class.
@SoullFire - I sometimes have to use the dictionary :). I actually have dictionary.com send me new words to my e-mail account. The thing is, you have to use the new words you learn as often as possible or you'll forget them (unless you have a photographic memory). I remember during my high school AP English 4 class, our teacher would make us remember 100 words and their definitions for each bi-weekly quiz every other month. Talk about putting your brain in overdrive. I seriously thought that was not an efficient way to enhance students' vocabulary.
I majored in Health Science with a Concentration in Gerontology, basically in the field of Public Health/Service. However, I did enjoy my Chemistry and Biology courses. We didn't have AP Biology during the time I attended my high school. However, now they do have it according to my brother's class schedule.
By the way, I really like reading about your investment entries. They're really insightful and straight to the point.
Happy 4th of July to you as well :)!! Yeah, G. talks way too much about the market, teaching me the methods of short-hand selling & telling me how much the Dow dropped today. =) lol. I'm taking stats soon...and a financial market analysis class, as well as math for econ. and all those other math classes for econ majors after pure math--Calc I & Calc II. No way am I taking multivariable calc I. I'm going dieeee x_x''. Last semester, while my fellow freshmen peers took the easy classes, I ended up taking calc II and while they had fun during their spare time and didn't have to study much; i ended up using my spare time to study differential equations and the 423904832 million ways to integrate integrals!!:(.
I was doing pretty good at day trading when I was 13... but then again, I was taking algebra- what most high school students were finally taking in 12th grade.
@TheCheshireGrins - True- when you can see what the direct applications are such as investing, math gets much more interesting!
@ladyofthesilk - Now it's my turn to thank you for your kind words. =) I'm sure glad I didn't have your AP English teacher - that fire hose method of learning new words sounds brutall=:-0
@SoHoian_NightOwl - Calc can be a pain, but if you ever take the abstract stuff like Modern Algebra, you'll long for the days of Calc again. Abstract math with ring and field theory was my nightmare......(shudder).
@jayyz - Wow - day trading at 13? Impressive! I wish I had started at that age! Were your parents worried? You must have quite a bit of accumulated knowledge under your belt.
@SoullFire - I remember trading on schwab for $29.95 a trade. Each trade I got free online quotes. I miss the days when amazon, ebay, and cmgi would shoot up like $30+ a day. Crazy times... The parents weren't that worried because they were busy day trading too, plus I was trading with my own money from my paper route. All the experience and knowledged I've gained is pretty much useless- I'm in the red... argh... it pisses me off.
@jayyz - Sometimes we hit slumps......but they pass. I have to say I've learned much more during my difficult times...and it also keeps be grounded in remembering to limit the amount of risk per trade.
After putting in that much time, I'm sure you'll figure this market out.