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Other Articles
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Stocks
Decision Vs. Outcome
By Tim Koenning
Registered Investment Advisor Representative, Magnolia Financial Advisors, LLC
When you make a decision to buy a stock, you have to realize that the outcome is independent of the decision. That is, you don't always achieve the outcome you would like -- that of making money. But over time, if you use successfully tested risk management tools properly, which are designed to improve your probabilities, you will likely have more positive outcomes than not.
In investing you must realize that nothing is a guarantee or a lock. The best you can do is to stack the odds of success in your favor, make the proper decision according to what your investment tools are telling you, and then wait for the outcome. The methodology you employ must be designed to improve these probabilities of success in investing, thus helping you to make a sound decision.
Unfortunately, this investment game is not always accommodating. There are times when you make the proper decision, but don't get the outcome that you had anticipated. Does that mean you were wrong? No. Not every trade is always going to work out exactly as you have planned. You will have times when a stock will go against you for any number of unforeseen reasons. That is life on Wall Street. But investors falsely believe that if a trade doesn't work out that you made a bad decision – that's wrong. Therefore it is imperative to educate yourself. Be sure you understand the game plan, and know why you are making certain decisions. As a result, you will be able to accept the outcome; good or bad, if you know the tools were used correctly.
To illustrate how the "decision" should be looked upon as separate from the "outcome," let's look at the following scenario:
Scenario: There is a coin that has a Heads and a Tails.
If the coin is tossed and a Heads comes up you will be paid $1.25 If the coin is tossed and a Tails comes up you will lose $1.00
Shouldn't you always bet on Heads? 50% of the time Heads will come up and you will be a winner, and 50% of the time Tails will come up and you will be a loser, but over time you will make more money because you are paid more for the Heads.
So the point is, if your investment tools tell you to make a certain decision based on the information you have at the time, make the decision. Over time, since these tools are designed to increase your odds of success, you will be a winner.
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