Buying Apple vs. buying BlackBerry
According to my calculations, a $1,000 investment made in Apple early August 2008 would be worth more than $18,000 as of August 2, 2020, or over eighteen times as much, including price appreciation and excluding dividends.
But, had you invested the same $1,000 in the predominant cellphone maker in that year, BlackBerry, your capital today would be almost zero.
So, it is no wonder ancient greek flocked to the Oracle of Delphi. They knew the importance of anticipating future outcomes.
The lesson here is: big rewards await for those who can see the future. And now, a team of neuroscientists from the Max Planck Institute is rethinking which probabilities more accurately predict future events.
“For the brain, the estimation of event occurrence is influenced by two main sources of uncertainty: the actual probability distribution of events and the brain’s inherent uncertainty in estimating elapsed time,” said Matthias Grabenhorst, Georgios Michalareas, and colleagues in the study, which was recently published in Nature Communications.
What the Max Planck research team wanted to find out with this experiment, which was based on the predictions of real people in a controlled setting, was whether our brains get the most accurate results using the proportional hazard rate (HR) model or the probability density function (PDF).
The HR model says how probable it is that an event will happen during any given stretch of time.
The PDF model relies more on stats. This is when your brain figures out how likely an outcome is for a discrete random variable.
The Max Planck research team concluded that most human predictions fall somewhere in between a precise win and a total fail.
So, coming back to our Apple and BlackBerry example, a “precise win” would be to buy all $1,000 in Apple, and a “total fail” invest all in BlackBerry. But, since nobody (we don´t have Pythias anymore) can make a 100% accurate prediction, a realistic solution, then could be:
buy $500 in Apple and buy $500 in BlackBerry
Why?
Let´s do the math.
Apple stock price in 2008: $20.28 (average for that year). That is 24 shares.
BlackBerry stock price in 2008: $97.4 (average for that year). Or, 5 shares.
(Please note that the prices reflected market sentiment: BlackBerry was the dominant force).
Since then, things had changed… let´s say… a little bit:
Apple stock price (September 2020): $6,216.00*
BlackBerry stock price (September 2020): $4.69
(* Apple stock has done a 2:1 split 3 times, and a 7:1 split. So that is 2 * 2 * 2 * 7 = 56:1 split, so simply multiply the current price by 56.)
And the value of our shares today:
Apple: 24 shares at $6,216 = $149,184
BlackBerry: 5 shares at $4.69 = $23.45
For a grand total of $149,207.45
And, yes, you could probably just buy Apple stocks and forget about BlackBerry. But that is the point: nobody knows the future.
