If you fill a coin a number of times over the long term the odds will come out 50 -50, we all should now that. There is a computer game which adds a twist that everyone can learn from – Rational Decision-Making under Uncertainty: Observed Betting Patterns on a Biased Coin by Victor  Haghani and Richard Dewey. They authors did an experiment on if you know the heads is going to come up 60% of the time and had $25 to start with – what would the result be? The issue is in the short term how much do you bet on each flip of the coin. In the experiment, 30% lost all their money, but they should have done better. The reason they lost money was the although they knew the long terms odds favored them, the short terms were unknown. The issue is how much money do you risk on each toss, when you have the one period of negative performance do you double down? betting all of your money  hoping you will make it up on the next flip? Some were betting on tails, instead of heads? They were doing what people do in the market place generally do.

The key according to the Kelly criterion which consists of a constant fraction of your bank account. This fraction is tied to your probability of winning. In this the ideal was betting 1/5 of your bankroll of each toss. In the experiment 13 of the 61 did manage to reach the top payout within the 30 minutes.

The writer of the article Ian McGuguan believes the most important lesson the coin toss teaches is the discipline in investing, not the brilliant idea. The discipline to reach a reasonable reward because they did not stick to a simple, consistent strategy that realistically balanced risk and reward.

Linking to dividend paying stocks, the ideal is to bet on a favorable outcome, if you do not know the outcome at least you can pick up dividends. We never know the short term performance of the market, once in a while you can see stocks that are undervalued and should be higher but need to wait till the street sees the market as you do. Since we do not know, you might as well gain insurance on your pick by choosing a stock that pays a dividend and wait till the market increases the P/E ratio.

There are more questions than answers, till the next time – to raising questions.