Shifting Shares (5 March 2019) – Statistical Seduction & City Financial
The Seduction of Statistics
Red Emperor Resources (RMP) announced an RNS on Friday which promptly tombstone piledrivered the price by 60%. Many punters like to bet on these speculative oil drills in the hope of making big money. There’s nothing wrong with this, but the problem comes when statistics are used in order to back up the point.
I saw a lot of “26/26” tweets being bandied around – referring to the 26 drills and 26 oil strikes in the area. This was being used as an argument to suggest that RMP’s drill would likely strike. It makes sense, right? If there is a 100% strike rate out of over 20+ neighbouring drills then surely Red Emperor’s has a high probability of success.
But the geological chance of success was around 30% which was published for all to see in an RNS. That’s worse than a coin flip. So here we have two very different figures, and of course we know which one was the preferred one.
The facts are that if you flip a coin ten times, and it lands on heads, the probability of it landing on heads the eleventh time is still 50%. The geological chance of success took into account all of the previous strikes and still gave a ~30% chance after factoring all of this information in.
The message here is to decide what statistics you choose to look at. We all suffer from confirmation bias, which leads us to actively choosing the information that agrees with us. Once we take a position, we are no longer completely objective, and thus emotionally invested in wanting to be right.
Trading bad news
Bad news is proving to be a great opportunity to profit in this market. I think that this is because the market is fairly risk-off and so anything bad is getting absolutely hammered. This then creates oversold stocks which sharply bounce. We’ve seen this in Purplebricks, Red Emperor (when they released another RNS!), Proactis (PHD), Motif Bio (MTFB). Bad news is great (as long as you’re not in beforehand!)
Another piece of bad news that will effect the market is City Financial going under. These guys loved to take placings and IPOs and flip for a quick turn, which annoyed many a private investor. They have been aggressively selling down holdings, and one opportunity is potentially Horizonte Minerals.
Horizonte Minerals (HZM)
Look at the volume in the last few days. Large aggressive dumping started from around 2.7p.
(Chart taken from SharePad)
I don’t know much about Horizonte, but looking at the nickel price, this has been on a tear in recent weeks. There may be a short-term trading opportunity to reach around the previous high at 2.7p.
Another short one from me this week, but there is little for me to comment on right now!