Investing

I discussed a merger arbitrage opportunity in Felix Resources. There was no counter offer and the deal went ahead for a 27% annualized profit. The interesting question is whether or not I got the probabilities correct.

James Moniter, previously of Soc Gen fame, wrote an excellent strategy piece on Process not outcomes: gambling, sport and investment! He discuss outcome bias, that is judging a decision differently based on the outcome. He cites multiple examples of where the quality of a decision is judged differently based on the outcome rather than the process used to derive that outcome. This is a serious misjudgement, the best performers in any field focus on the process not the outcome. He cites a great blackjack example. If you think hitting on 17 and get a 4 was a good decision then you are focusing on the outcome and not the process. It clearly is not a good decision.

I’m going to stick with my original Felix probabilities and conclude that I simply had a bad break. I assigned a 60% chance to a higher offer of some sort, a 10% chance of deal failure and 30% chance of the deal going ahead unmodified. That is in fact what happened. Of course the beauty of the opportunity was the positive expected value and I ended up with a positive outcome, just not as positive as expected.

posted by Neil  # 7:54 AM