Probabilities

 

  By Guest Blogger Doug Rowat

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Like many parents at summer’s end, I’d officially run out of ways to entertain my kids. So, I went with the very best of old-school options: Monopoly.

During one game, my daughter had enough money to buy a house on one of her red properties and she asked me where she should place it. I was swinging around the board, seven spaces away from Illinois Avenue. Thus, it became a perfect opportunity to introduce her to probabilities.

Before she decided, I showed her the below chart:

Two (6-sided) dice roll probabilities

Source: GIGAcalculator.com

She made the correct decision and placed the house on Illinois Avenue. (I also explained to her that Boardwalk and Park Place aren’t nearly as desirable as many believe, more on this later.)

Shortly after, I was listening to Michael Lewis’s (of Moneyball and Liar’s Poker fame) podcast, Against the Rules, and he was discussing the rise of online sports gambling. One of the online sports-gambling companies’ most profitable offerings (profitable for them) is the parlay, where bettors must win a series of wagers to receive a payout. The reason the parlays are so profitable is because bettors usually misunderstand the odds. They’re dazzled by the payout of an offered 50-1 parlay but fail to recognize that the true odds should actually be, say, 100-1. The gambling companies capitalize on this probability misread.

In a sense, investing is a game too, and players in this game also frequently fail to recognize true odds. With this in mind, here are the top-5 probability mistakes that I continually see my clients make.

• Selling everything (‘going to cash’) when markets are under stress. This happens more frequently than you think, especially over the past five years as the market crises have included Covid, inflation and, now, tariffs. Never mind the enormous potential tax consequences of such decisions and that markets, more often than not, move higher, these decisions are never prudent because they assume certain forecasting. If you sell everything, you’re 100% positive that markets will continue to decline. But no one can be 100% certain. All good poker players know this. Always hedge your bets.
• Investing in mutual funds. Collectively, mutual funds act as the house at a casino. The high fees charged by the fund managers are the rake and the rake ultimately erodes investor return. In the case of mutual funds, fees erode returns to the extent that benchmark outperformance becomes nearly impossible. Here, for example, is the percentage of Canadian fund managers that have outperformed their benchmark over the past decade:

10-year track record for Canadian fund managers

Source: SPIVA

• Assuming that, because you work there, you have special insight into your company’s fortunes. This familiarity bias often leads to concentrated holdings of company stock. Companies can have thousands of employees across bifurcated departments, so almost no one actually knows what’s going on within the company overall—and sometimes even those you would expect would know, don’t. Toronto-Dominion Bank stock has recovered this year, but certainly none of the bank’s 100,000+ employees and, apparently, the majority of its executives, seemed aware of its anti-money laundering failures and the resulting US$3 billion in fines, which led to TD stock’s more than 13% decline last year and its massive underperformance of the other Canadian banks. Employees making concentrated bets (anything more than 10% of their overall investment portfolio) in company stock also rarely pay attention to the amplified risk: if your company’s stock declines, probably your job security does as well. Just ask TD’s former CEO Bharat Masrani.
• Thinking you can day-trade as a hobby. Such optimism appears in our younger, hot-shot clients and, on the flip side, our retired clients who now think that they have the time to dedicate themselves to this risky activity. Fortunately, for most, it’s done with ‘play money’, but research from academics Brad Barber, Terrance Odean and others nicely sums up your odds of day-trading success:

Heavy day traders appear to trade at favorable prices, but only a select few are sufficiently savvy to consistently earn profits net of their trading costs. More than eight out of ten day traders lose money in a typical semiannual period.

• Emphasizing tax over outlook. Clients too often make investment decisions based solely on tax consequences. If you bought $8,000 worth of a security and were advised to sell it at $10,000 because of deteriorating fundamentals but resisted that advice because of the capital-gains impact then you’re incorrectly emphasizing tax expense over the potential market cost. Everyone’s tax situation is different, of course, but a $2,000 capital gain would amount to, for most, a tax expense of $300-$400 dollars. Even a modest 15% drop in the security price amounts to a loss of $1,500. There’s danger in constantly kneeling at the altar of the tax gods, but at minimum, the decision not to sell the security is illogical because you’re paying for investment advice and then ignoring it.

Finally, I return to Boardwalk and Park Place. While these properties certainly have usefulness, they’re not even close to the most strategically valuable. According to Reader’s Digest, which interviewed the reigning world Monopoly champion (yes, there is such a thing) and the founder of Probabilities in the Game of Monopoly, amongst other experts, the most desirable properties are the orange ones—St. James Place, Tennessee Avenue and New York Avenue:

An orange monopoly not only offers more opportunities to collect rent (they’re landed upon most often), but it also means you won’t be paying rent every time you land there. Moreover, monopolizing the orange properties means you can develop them with houses, which offers a particularly good return on investment.

Now you know.

Always keep the odds tilted in your favour.

Most land-on Monopoly properties

Source: Reader’s Digest

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/09/13/probabilities/