Teach yourself to THINK in PROBABILITIES and in MULTIPLE SCENARIOS.

Without question, Buffett's success is tied closely to number.

"One of the advantages of a fellow like Buffett is that he automatically thinks in terms of decision trees and the elementary maths of permutations and combinations."  (Charlie Munger)

Most people do not.

It doesn't appear that the majority of investors are psychologically predisposed to thinking in multiple scenarios.  

They have a tendency to make decisions categorically while ignoring the probabilities.

Thinking in probabilities

Thinking in probabilities is not impossible:  it simply requires attacking the problem in a different manner.

If your investing assumptions do not express statistical probabilities, it is likely your conclusions are emotionally biased.

Emotions have a way of leading us in the wrong direction, especially emotions about money.

But if you are able to teach yourself to think in probabilities, you are well on your way to being able to profit from your own lessons.

Not often will the market price an outstanding business or any other outstanding businesses substantially below their intrinsic value.

But when it does occur, you should be financially (have the CASH)  and psychologically prepared (have the COURAGE) to bet big. 

In the meantime, you should continue to study stocks as businesses with the idea that one day the market will give you compelling odds on a good investment.


"To the Inevitables in our portfolio, therefore, we add a few Highly Probables." (Buffett)

Investing mantra: Consequences dominate Probabilities

"Investing isn't just about probabilities. It's about consequences, and you've got to be prepared for them." - John Bogle 

Thinking in terms of Probabilities of Loss and Expected Returns

http://valuehuntr.com/2009/06/26/our-alternative-to-capm/

Probability of Return in Investment, Speculation and Gambling

The main difference between investment, speculation and gambling is the "ex ante probability of obtaining a reasonable return which is known at the time when each of these three activities is carried out".

Ex-Ante Probability of Return

Investment -  Good
Speculation - Uncertain
Gambling - Negative

What this means is that we are fairly confident that we can make a reasonable amount of money by making a true investment; we are uncertain as to whether we can make money from speculation but we are sure that we will lose money by gambling. 

The sidetracking of investors into speculation and even gambling is the worst enemy of good investment.

We must be ultraconservative and maximise the odds in our favour.  If a stock analyst warns you that there is only a 10 percent chance that prices would rise above this level, you should avoid buying shares at that level.  On the other hand, if he says that there is a 90 percent chance that share prices would not fall further, we should certainly grasp the opportunity and buy. 

Consequences must dominate Probabilities

In making decisions under conditions of uncertainty, the consequences must dominate the probabilities. We never know the future.

The intelligent investor must focus not just on getting the analysis right. You must also ensure against loss if your analysis turns out to be wrong - as even the best analyses will be at least some of the time.

The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, and those odds are entirely out of your control. However, you do have control over the consequences of being wrong.

Many "investors" put essentially all of their money into dot-com stocks in 1999; an online survey of 1,338 Americans by Money Magazine in 1999 found that nearly one-tenth of them had at least 85% of their money in Internet stocks. By ignoring Graham's call for a margin of safety, these people took the wrong side of Pascal's wager. Certain that they knew the probabilities of being right, they did nothing to protect themselves against the consequences of being wrong.

Simply by keeping your holdings permanently diversified, and refusing to fling money at Mr. Market's latest, craziest fashions, you can ensure that the consequences of your mistakes will never be catastrophic. No matter what Mr. Market throws at you, you will always be able to say, with a quiet confidence, "This, too, shall pass away."

Ref:

The Intelligent Investor by Benjamin Graham

Pascal's Wager
http://www.infidels.org/library/modern/theism/wager.html