Put the armor where you DON’T see bullet holes

Put the armor where you DON’T see bullet holes

Abraham Wald wasn’t an airman in World War II, but he sure saved thousands of them.

He was a mathematician tasked with figuring out where to put extra armor so their bombers wouldn’t get knocked out of the sky by enemy fire.

Clearly you couldn’t simply add extra armor everywhere on an airplane, or it wouldn’t get off the ground, let alone to its destination.

So they turned to statistics to tell them where to beef up protection.

The commanders’ instinct was to put the armor in the most heavily bullet riddled areas.

Makes sense right?

Well, Wald pointed out that was completely the WRONG thing to do.

If an area of a plane is riddled with bullet holes, and still managed to fly back to base, you don’t need extra armor there.

They made a classic error – they forgot about the planes that DIDN’T make it back to base.

By examining hundreds of aircraft and their shot up locations, he was able to determine that you could make Swiss cheese out of these bombers just about everywhere…

Except near the tail, and the fuselage between the wings.

Those are the Achilles heals of the aircraft.

That’s where the extra armor needed to go in order to save lives.

In the stock market, you very rarely have access to the companies that didn’t make it.

The stocks that petered out and went to zero.

And conversely, the stocks that were snatched up by the big dogs for a hefty premium.

For the most part, if you buy stocks that are going up, you have a greater chance of encountering the later scenario.

But if you are trying to buy the dip a la Warren Buffett, you are probably going to be in for a big surprise with your real life, non-simulated trading.

You forgot to include the companies that didn’t survive in your testing.

The Enrons. The Iomegas. The WorldComs.

In other words, you put the armor on the wrong parts of the plane.

A buddy of mine was a trader back in the late 90’s and early 2000’s.

He traded on “dead cat bounces.”

That’s where you buy a beaten up stock and sell when it goes up a bit.

Problem was that his cats didn’t bounce too well.

Just like with real cats, few do.

Stocks are often selling at low levels for a reason.

His account didn’t bounce up either, so he’s outta the trading game.

As far as being a trader goes, he didn’t survive.

So where can YOU put more armor on your trading account so you don’t get shot out of the sky?

The first option is to include delisted stocks in your database. It’s expensive. I pay 5-figures per year for it.

The easier option is to buy stocks going up.

There are dozens of indicators to help you determine if a stock is trending up.

Moving averages are a good start.

There are no guarantees that a company won’t go bankrupt while it’s stock price is moving up – just as there are no guarantees that Earth won’t be hit by an asteroid tomorrow – but it’s not likely.

Price was moving down well ahead of Enron being exposed as a fraud, and ultimate bankruptcy.

You also get the added benefit of seeing your stock bought out for a hefty premium.

Imagine logging into your trading account, and seeing your “over-priced” stock explode 20-30% overnight.

If you put the armor in the correct spots, you can win the war.

Trade smart,

Dan