Making better investment decisions by thinking probabilistically

In my last article, I screened for turnaround stocks, those that had high Value and Momentum Ranks. Several of the screen results were subject to takeover offers. This may mean that cheap stocks where trading momentum has turned positive are attractive to acquirers. However, we need a much larger sample size than three to say that for definite since it is also possible that the takeover is the source of the positive change in price momentum. It may be an outcome rather than a cause. For example, TI Fluid Systems (LON:TIFS) had a decent StockRank prior to receiving an offer, but Momentum was its lowest component. Whether it is cause or effect, investors in turnaround stocks need to be prepared for the odd takeover offer.

When faced with an investment opportunity, investors typically use investment ratios to help assess its suitability. For example, Quality investors may look at long-term returns on capital or equity, Value investors may use P/E ratios, and Momentum investors may examine recent price changes. Most investors will look at all of these factors and many more. The Stockopedia StockRanks take many of these metrics and combine them to give a single measure, which may...