Ken Kam's Best Ideas Blog

The book Moneyball describes how the Oakland A's use statistics to select and manage baseball players. Their insight is simple and powerful. In baseball you win games by scoring runs. If you want to score more runs, figure out what player attributes correlate to scoring runs and hire the players who best exhibit those qualities.

With investing the objective is to make money. If you want to improve your investment returns, what statistics should you track? Two that I have found useful are what I call the winning percentage and the win/loss ratio.

To calculate the winning percentage you'll first need to make a list of all the stocks that you've ever held in your portfolio. Next, for each stock (or position) on the list, mark the ones in which you've made money over the life of your portfolio. Total the number of positions in which you made money and divide it by the total number of all positions. The resulting percentage is your winning percentage.

The winning percentage tells you if you're doing a good job of choosing which stocks to buy. The higher your winning percentage is the better. A 50% winning percentage means that all the time and effort you put into selecting stocks adds almost no value. You would have done just as well flipping a coin to select stocks. A winning percentage of 66% would be excellent and would rank among our best investors on this measure.

The win/loss ratio takes the winning percentage a step further. To calculate it, you will need to know how much money you've made or lost on each stock over the life of your portfolio. Calculate the average profit per winning stock and divide this figure by the average loss for all the losing stocks. The result is your win/loss ratio.

I use the win/loss ratio to tell me whether I am doing a good job of managing the stocks I've chosen for my portfolio. No one makes money on every stock they buy, so it is inevitable that you will have some losers. The trick is to recognize your mistakes early so you can close your losing positions before they lose too much money. And hang onto your winners long enough to maximize your gains.

An investor with a winning percentage of only 50% can still generate great overall returns if their winners make them more money their they lose on the losers. The very best investors we track have win/loss ratios between 2 and 6. A win/loss ratio of 2 means you're making twice as much on the winners as you lose on the losers.

Just like MoneyBall helps the Oakland A's look at the right statistics to help them win baseball games, the winning percentage and win/loss ratio can help you zero in a couple of key attributes for making money as an investor: are you investing in the right stocks and are you making more on your winners than you're losing on your losers.