I bought Noble Corporation (NE) for my wife's 401k portfolio earlier this year and I don't have to tell you how well its done since then. Despite my good fortune, I'm left wondering if this was just pure luck or the result of my good stock picking. What are the chances that that NE is a long time winner? That's a good question because not all oil drillers are created equal!
To help me figure this out, I've added Monte Carlo simulations to my standard stock picking process. In addition to looking a fundamentals, checking its underlying value, looking at its chart for good "low risk" spots and checking the overall market sentiment, I now run "what if" scenarios for these mutual funds and stocks.
I want to know if the returns for any asset is skewed in my favor over the long term! So is this the case with Noble Corporation? Using 10 years of weekly closing data I ran the simulation for 10,000 possible outcomes and have found that the I have a nearly 59% chance that the price change will be positive.
The observations are skewed in my favor as well, nearly 5,900 observations are positive and I have a return of 8.5% for NE at a 90% confidence level.
Now let's look at the outliers. There's roughly a 12% chance that my weekly returns are in worse than -7% and 24% chance that the returns are in excess of +8%. Even the outliers are skewed in my favor but knowing that I have a 12% chance of getting clobbered makes me want to either keep a trailing stop behind NE or build some cash to buy it on the cheap when I see price changes greater than 7%!