Stock Tips for Relatives

Answering 4 key questions

Has a relative ever asked you for a stock tip? My bet is that they have, probably the uncle you see once a year at Thanksgiving dinner who may have had a bit too much pumpkin pie punch. As you’re trying to enjoy some downtime, you’ll try to dismiss the request out of hand and throw out something like “Apple is gonna tank”.

You try to quickly satisfy the request, but your Uncle Larry starts to ask follow up questions. He has actually been thinking about investing in Apple, but wasn’t sure if it was the right time….

How might you have gotten him off your case quicker, with just a single statement?

Key Questions

In thinking about assessing investment advice for a security, a basic set of inquiries come to mind:

• How much is it going to move?
• Over what horizon will this move take place?
• Why is this going to happen? What is the catalyst?
• How likely is this to occur?

Taking your statement of “Apple is going to tank” as a starting point, how might we clarify it for Uncle Larry so he doesn’t ask any follow-up questions...

How much is it going to move?

Apple is going to drop 8%.

What’s the horizon?

Apple will drop over the next six months.

Why?

My thesis is that Apple’s new iPhone 11 isn’t that compelling, people aren’t going to buy it just because it has three cameras so sales will suffer.

How likely is this to occur?

There is an 89% likelihood that Apple is going to move lower.

Putting it all together…

There is an 89% likelihood that Apple is going to drop 8% on lower sales numbers over the next six months because the iPhone 11 isn’t compelling.

Now, you’re probably thinking to yourself, “that’s all well and good, but I’d just be guessing at those numbers!” Assuming you don’t have a crystal ball, we’ll remove the estimated returns while assuming your opinion on Apple’s directional move remains valid. That still leaves your estimated confidence in the event occurring.

How might you actually communicate your thoughts without using numbers?

In 1964 Sherman Kent, director of the Office of National Estimates at the CIA, provided the first framework to bridge people who preferred quantitative odds vs those who preferred wordy probabilistic statements (as he described them, mathematicians and poets). Words became quantified and standardized in the intelligence community, so that if you said “probable” it was understood that meant a 75% chance, plus or minus 12%. Over time, word variants grew but the principles remained the same. More recently, a former colleague of mine co-authored a piece of research titled: “If You Say Something Is “Likely,” How Likely Do People Think It Is?” They show that, though Kent’s rubric might not be exactly correct, the general public commonly perceives certain words to mean certain probabilities.

Using the principles above, when solicited for a hot tip you might say “Apple will almost certainly drop over the next six months because the iPhone 11 isn’t selling”, stifling any follow-up questions because you have communicated your views on the catalyst, direction, and confidence of the outcome.

Though our statements may be backed by rigorous statistical backtesting, our insights feed strives to communicate information to users in exactly this way. At Toggle we focus on building human-centric technology to communicate complex information simply, concretely, and succinctly.