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"It's all about making money that's the facts and talk is worthless."

That's the comment one reader left on an article I recently wrote about casino giant Las Vegas Sands (NYSE: LVS  ) . Based on the available information, I argued that there wasn't a compelling case for buying Sands at today's price (just more than $50 as of this writing). The commenter in question disagreed with me, saying that we'd know who was right based on where the stock price finishes the year. After all, the comment implies, if you can't judge investing prowess based on profits, then how can you judge it?

The argument is compelling on the face. Certainly, every investor aims to make money with her or his investments. However, when it comes any particular investment, is the profit or loss that's banked really the best way to judge success or failure?

A lap around the track
Let's take the discussion to the horse track for a moment. One bettor at the track lays his money on SmartyBet, whose odds are listed on the tote board as 30-to-1, but who we know (with our hypothetical preternatural insight) has a 20-to-1 chance of actually winning. Meanwhile, another bettor puts money down on WayOverbet, a horse paying 3-to-1 whose actual odds of winning are 5-to-1.

The race is run, and WayOverbet ends up winning by a nose, paying our second bettor $3. Was that a good bet?

If all we care about is profit, then we'd say yes -- after all, that bettor has $3 instead of $1 in his pocket, while the other has a lonely spot in his wallet where a dollar used to be. But if both of these bettors make these same bets over the course of 100 races, it becomes quite clear who the smarter player is. Our first bettor will end up winning five of those 100 races, each paying $30, for a total of $150. The second better will win much more often, showing a "profit" 20 times out of the 100 races, but each will only pay $3, leaving him with just $60 for his $100 worth of bets.

Obviously, the most important thing here wasn't to show a "profit" on a given bet, but rather to make sure that each bet was smart -- that is, one that had better actual odds than what the tote board showed.

Process versus outcome
Probably the best discussion that I've seen about this issue comes from Michael Mauboussin's book More Than You Know. Tellingly, it's the very first chapter of the book, and it opens with this quote from Robert Rubin:

Individual decisions can be badly thought through, and yet be successful, or exceedingly well thought through, but be unsuccessful, because the recognized possibility of failure in fact occurs. But over time, more thoughtful decision-making will lead to better overall results, and more thoughtful decision-making can be encouraged by evaluating decisions on how well they were made rather than on outcome.

Mauboussin emphasizes the point, writing:

... investors often make the critical mistake of assuming that good outcomes are the result of a good process and that bad outcomes imply a bad process. In contrast, the best long-term performers in any probabilistic field -- such as investing, sports-team management, and parimutuel betting -- all emphasize process over outcome.

Winning the process game
Mauboussin very clearly lays out what the ideal goal of any investment process should be:

The goal of an investment process is unambiguous: to identify gaps between a company's stock price and its expected value. Expected value, in turn, is the weighted-average value for a distribution of possible outcomes. You calculate it by multiplying the payoff (i.e., stock price) for a given outcome by the probability that the outcome materializes.

What does this mean in practical terms? I often begin my investment research using a screen that identifies stocks with certain attributes. For our purposes here, let's say I'm looking for stocks that are currently out of favor with investors, so I set a screen looking for any stock that has declined by 20% or more over the past year and is currently trading at less than its tangible book value. Here are a few of the companies that pop up:


Year-Over-Year Price Change

Price-to-Tangible Book Value

Banner Corp (Nasdaq: BANR  ) (23.7%) 0.6
K-SEA Transportation Partners (NYSE: KSP  ) (61.4%) 0.4
Oilsands Quest (NYSE: BQI  ) (59.0%) 0.4
Hercules Offshore (Nasdaq: HERO  ) (38.1%) 0.4
American National Insurance (Nasdaq: ANAT  ) (26.5%) 0.6

Source: Capital IQ, a Standard & Poor's company.

To follow good process in evaluating these stocks, I'd first try to identify possible outcomes for them, and what those outcomes would mean for the stock price. Washington-state-based Banner, for instance, traded at more than twice its tangible book value prior to the financial crisis, so we could probably envision a case where shares recover to three or four times their current value. American National Insurance, meanwhile, has had cyclical valuation swings that have typically put its tangible book value multiple in a range of 0.5 to just above 1.0. In a scenario where toxic assets don't eat away at the balance sheet and investment returns start to increase, investors could see real upside here, too.

Of course, we also need to consider negative outcomes, as well. For example, investors would want to note that Oilsands Quest has never reported an annual profit. There may be a huge upside if the company finds a way to profitability, but its assets may not be worth all that much if it can only produce losses. Similarly, driller Hercules Offshore has been trying to find its footing again, but the need for a balance-sheet-strengthening capital raise may impact the value of currently outstanding shares.

Once you have a list of the potential outcomes for the stock in question, you can then weigh the potential for each of those outcomes to come to fruition, and end up with a good sense of whether the stock is a worthwhile investment.

The year-end review
Any one of these stocks -- Las Vegas Sands included -- may end the year with a higher or lower price than what the ticker tape shows right now. But the best investors won't spend all of their time focusing on whether there was a profit or loss -- but rather on evaluating whether the decision-making that led to the investment was sound.

The comment that I highlighted at the beginning concluded that "talk is worthless." Perhaps talk that focuses simply on the outcomes of investments is worthless. But I think few things are more valuable than talk that discusses potential investment outcomes and helps hone process.

Ready to apply good investing process? Check out the stock that my fellow Fools think could be the top stock for 2011.

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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends to a sharp stick in the eye.

Read/Post Comments (18) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 11, 2011, at 3:27 PM, hank000777 wrote:

    Mr. Sheldon Adelson - Sands CEO recently asked analysts: "if you're smart, why aren't you rich?" I agreed with him. Analysts are in investment business. They have all the tools, education, training and experience. And you cannot build wealth for yourself then what is the purpose of their existence? You need to walk the talk. There are text books for investing. And you follow its fundamentals. Some are successful because they understand it in depth. Most will fail because between the concept and reality are a big gap. That's why there are not many G. Soros, J. Paulson to name a few. Just like an old saying: "one who cannot do, can teach".

  • Report this Comment On January 11, 2011, at 3:35 PM, nasa172 wrote:

    Your analogy, A Lap Around The Track is invalid. You haphazardly assign fictious odds and derive your own meaningless results.

    Las Vegas Sands is a growth company that has far surpassed analyst estimates for earnings in the prior two quarters. In large part, due to the opening of Marina Bay Sands. An IR that has exceeded any planned revenue targets by a factor of 2. It is quickly becoming a dominant part of Sands bottom line not to mention it has a Singapore tax rate of only 15%.

    The margins are growing from 50% and are expected to level out at 60% EBITDA, at MBS. And, it is expected to eventually account for 40% of all of the EBITDA of Las Vegas Sands, and MBS did not even exist last year. It was still being built.

    The upcoming quarter earnings release will once again drive the stock price possibly to new all-time highs. And, Motley can use An Egg In Your Face towel provided by Sheldon (Sands CEO) to wash away their prior negative comments about Las Vegas Sands as a great long term investment.

    All is my opinion.

  • Report this Comment On January 11, 2011, at 4:05 PM, TMFKopp wrote:


    I'm not sure I quite follow where you're going with all of that, but I'll throw out a few things. First, like pretty much all of the writers writing for, I invest my own money. So these are not simply theoretical spoutings, but rather analysis that I'd use in my own portfolio.

    In addition, I make stock picks in my CAPS portfolio ( I gave LVS an outperform rating in my CAPS portfolio in July of '09 after I publicly highlighted it and other casino stocks as cheap ( LVS has been the best performing pick in my portfolio. So the fact that I would say I don't like the stock now has nothing to do with any long-standing hatred for the stock or the company, but rather a view that the shares no longer offer an attractive opportunity.

    Finally, it seems your logic would have you dismiss analysis from anybody that's not "rich." I'd be careful with that. While there may be good sense in paying more attention to those that have been successful, it never hurts to at least weigh information from a variety of sources/people -- including those that disagree with your opinion.


  • Report this Comment On January 11, 2011, at 4:10 PM, TMFKopp wrote:


    "Your analogy, A Lap Around The Track is invalid. You haphazardly assign fictious odds and derive your own meaningless results."

    I think you may have missed the point of the illustration. The idea is that one bettor was betting (as seasoned gamblers would put it) with the best of it, while the other was not. The fact that one player showed a "profit" on his bets more often did not mean that he was placing the smarter bets.

    As for the rest of your comment, those are definitely some very positive points on Sands. Of course, as I noted in my previous article (, I really like Las Vegas Sands as a company. It's justifying the current price that I find more difficult.


  • Report this Comment On January 11, 2011, at 4:19 PM, MiserableOldFart wrote:

    The article reminds me of one of the best, and most painful bets (small though it was) I ever made in my life: I bet on the Red Sox over the Mets in 1986. The Mets were favored and I felt then (and now) that the Sox had the better team. Have mentioned to people many times that the odds are what it's all about and how many times I wish I had that opportunity to make that same bet every October for the rest of my life.

    If you're playing longshots, and you spread your bets around and come up winning X% a year as opposed to the same X% in safer bets, the success of your investment strategy would most likely be measured by how much gambling you like to do. Compulsive gamblers are bettter off in the market than the track because the track is a less than zero sum game, and for practical purposes the market is a greater than zero sum game, if you avoid too many expenses.

  • Report this Comment On January 11, 2011, at 6:45 PM, kelly347 wrote:

    Actually, your hypothetical argument is skewed. Investor#1 has the 3-1 odds, but #2 has 20-1; so if he wins 20x, then he ends up with at least $400, not $60. For me, there's truth in long term investments accruing greater income although the ride is like a MIG roller coaster, and if you can't take the pressure, you lose. Ironic how you used a 'gambling' example as this is what the markets have become. Silly me, I thought I was an investor. WE would all earn more money if the SEC would stop the scams.

  • Report this Comment On January 11, 2011, at 7:47 PM, eatmeee wrote:

    Another rambling so called analyst, just brilliant, in his eyes anyway. Analyst, a day late a dollar short...We don't care anymore what the so called experts think...90 % of the time wrong, all ego no valid info....Press ignore folks and do your own research, you'll be much better off.

  • Report this Comment On January 11, 2011, at 10:04 PM, TMFKopp wrote:


    "Actually, your hypothetical argument is skewed. Investor#1 has the 3-1 odds, but #2 has 20-1; so if he wins 20x, then he ends up with at least $400, not $60. "

    I think you may have misread. The first bettor has stated odds of 30-1 and actual odds of 20-1, while the second has stated odds of 3-1 and actual odds of 5-1.

    "Ironic how you used a 'gambling' example as this is what the markets have become. Silly me, I thought I was an investor."

    Actually, there is a lot of overlap between investing analysis and parimutuel betting. So we're not talking the same "gambling" as we are if we compare it to, say, craps or roulette where the throw of the dice or spin of the wheel is 100% blind luck.


  • Report this Comment On January 11, 2011, at 10:07 PM, TMFKopp wrote:


    I'm very curious to hear the results of your own analysis as all I've seen you do is spew vitriol at analysis that you don't agree with. I'm all for hearing different views from my own, but your comments aren't very useful when they don't provide any analysis of their own.


  • Report this Comment On January 12, 2011, at 12:01 AM, Merton123 wrote:

    People who invest their money directly in stocks are trying to pull a nonrepresentative sample whose average is greater then the population average. The more samples that you pull the higher the probability that you will get the population average minus your expenses. That is why Warren Buffet states make only one purchase decision a year and then sit on your hands. Warren Buffet plays bridge and read a lot while waiting a long time for his next investment purchase.

  • Report this Comment On January 12, 2011, at 7:52 AM, 10HighSigns wrote:

    It seems Matt Dummkopf has a problem with the fantastic rise of LVS and that he missed the boat

    on recommendation a long time ago. He most

    likely has a problem to sleep or rest whenever the

    Sands goes up so he rushes to post something.

    Of course, the fool has his own reommendations

    which may not have faired so well.

  • Report this Comment On January 12, 2011, at 9:12 AM, theredbaron15 wrote:

    Excellent analogy and analysis. I also see LVS as currently being quite expensive.

    It brings a smile to my face to see all of these ignorant responses to your post. Its a bit like the relief a kid might get at basketball tryouts when all the other kids are missing layups.

  • Report this Comment On January 12, 2011, at 11:49 AM, aeropater wrote:

    Looks like you hit a nerve or two. Great article!!!

    The point that is missed with analyst is that they are paid to focus on the next minute or two........not long term because "buy this because it will produce outstanding results over the next 10 years" doesn't create much volume.

  • Report this Comment On January 12, 2011, at 1:32 PM, TMFKopp wrote:


    "It seems Matt Dummkopf has a problem with the fantastic rise of LVS and that he missed the boat"

    Hahaha, Matt Dummkopf, really? Are we still in middle school?

    Thanks for the laugh though.


  • Report this Comment On January 12, 2011, at 1:38 PM, 2008Mike1973 wrote:

    Matt -

    I thought your point about decision-making relative to outcome was well made, though I'm not prepared to make a judgment on LVS.

    I did review the other responses to your article and would suggest that many of the comments are not worth your time and effort to consider for a reply. It is an unfortunate fact that much of the public's common discourse contains more emotional outburst than honest effort to understand someone else's point of view.

    As for criticism of stock analysis and analysts, I've noticed that even Warren Buffet is a frequent recipient of criticism from people who seem to deliberately misunderstand his point of view or are too impatient to recognize its value. Apparently his wealth doesn't give him any credibility.

    Regardless, I enjoyed your article.

  • Report this Comment On January 12, 2011, at 4:23 PM, TMFKopp wrote:




  • Report this Comment On January 17, 2011, at 6:47 AM, jpwallis01 wrote:

    Matt, great article. I have not payed one iota of attention to LVS this past year. In fact I didn't even look at the stock price while reading this article. It seems most of the morons missed the point completely, although they should consider reading this article again w/o regard to LVS and they might learn something. Thanks Matt, very well put.....Jason

  • Report this Comment On February 02, 2011, at 1:46 PM, Anonymiser wrote:

    Matt, I loved your article.

    I confess that the part about betting at the track left me scratching my head, but the rest of it sounds right on the mark. You gave good advice for living, whether that was your intention or not.

    With everything in life we should do our best within the parameters of our own circumstances. Whether in choosing a life-partner, choosing a car, a house, or investing, we should do what we consider is best. Sometimes things don't go as well as we would have liked, and sometimes outcomes exceed our expectations, but that is life. As long as we make what we consider to be a good faith effort to succeed, that is all we can ask of ourselves.

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