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Two weeks ago I wrote an article where I predicted that AMC Entertainment (AMC) stock would double. I did not have any kind of inside knowledge. I did not know that it would skyrocket 500%. It rose from $2.18 when the article came on Jan. 13 to $13.26 as of Friday, Jan. 29.
What I did do was a simple probability exercise. At the end of the article, I used a simple trick that both hedge funds (in merger arb situations) and poker players (especially after the “flop” in Texas Hold-em) use to estimate their chances.
Using Probability Analysis To Pick Stocks
I estimated that there was at least a 50% probability that AMC stock would triple from here. In addition, I also put a 50% probability that the stock would lose all of its value.
That simple math equation works out to this: The upside scenario: 50% times 300% equals 150%. The downside scenario: 50% times negative 100% (i.e., you lose all your money) equals negative 50%. Therefore, if you add 150% to negative 50%, you get +100%. In other words, there was a high likelihood that AMC stock would double.
