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Navigating Investment Uncertainty: The Possible, Plausible, Probable Approach

Updated: Mar 22

Different kind of analysis models are essential for investors to assess investment opportunities, whether it's a stock, bond, startup or other asset. The "Possible, Plausible, Probable" model is a strategic approach that categorizes investment outcomes based on their likelihood and potential impact. This article will explore this model providing examples to help investors understand and apply it effectively.

Understanding the Model

The "Possible, Plausible, Probable" model divides potential outcomes into three distinct categories:

  • Possible: This category includes outcomes that can occur but may have a low probability. These are often outlier events or scenarios that, while not impossible, are unlikely to happen. Investors need to be aware of these possibilities as they can have a significant impact if they do occur.

  • Plausible: These are outcomes that are more likely than possible scenarios but are still not the most likely to occur. Plausible events are typically based on a reasonable set of assumptions but may depend on several factors aligning in a certain way.

  • Probable: This category represents the most likely outcomes based on current information and analysis. Probable scenarios are those that investors believe have a high chance of occurring and are often the basis for most investment decisions.

Applying the Model: Examples

Technology Stock Investment: Consider an investor evaluating a technology stock:

  • Possible: The company develops a groundbreaking technology that revolutionizes the industry, causing its stock to skyrocket.

  • Plausible: The company continues to grow at a steady pace, in line with industry trends, offering moderate returns.

  • Probable: The company faces increasing competition and market saturation, leading to slower growth and modest stock appreciation.

Real Estate Investment: An investor considering a real estate investment might assess:

  • Possible: A significant economic downturn leads to a collapse in the real estate market, drastically reducing property values.

  • Plausible: The local economy continues to grow, leading to a gradual increase in property values.

  • Probable: The real estate market remains stable, with property values increasing at a rate consistent with historical trends.

Bond Investment: For a bond investment, the scenarios could be:

  • Possible: The issuing company faces financial difficulties, leading to a default on the bond.

  • Plausible: The interest rates rise modestly, leading to a decrease in the bond's market value but continued interest payments.

  • Probable: The bond continues to pay interest as scheduled, and the company remains financially stable.

Startup Investment: An investor considering an investment in a startup might evaluate the following scenarios:

  • Possible: The startup disrupts its industry with an innovative product or service, leading to rapid growth and significant returns for early investors.

  • Plausible: The startup achieves moderate success, carving out a niche in its market. It sees steady, if not exponential, growth, providing a reasonable return on investment.

  • Probable: The startup faces challenges typical to new businesses, including competition, market entry barriers, and scaling difficulties, leading to modest growth or potentially stagnating.

Using the Model Effectively

Investors can use this model to structure their thinking around different investment scenarios and to prepare for various outcomes. It encourages a comprehensive analysis that goes beyond just the most likely scenario, considering the full range of possibilities.

Key Considerations

  • Risk Assessment: Each category comes with its own risk level. Probable scenarios usually carry the least risk, while possible scenarios are the most risky.

  • Diversification: Understanding these scenarios can help investors diversify their portfolio to mitigate risks associated with less likely, but high-impact, events.

  • Dynamic Analysis: The categorization of an outcome can change over time as new information becomes available, so it's important to continually reassess these scenarios.

Integrating the Model with Other Investment Strategies

While the "Possible, Plausible, Probable" model is valuable on its own, its effectiveness is enhanced when integrated with other investment strategies and analytical methods. Here's how it can be combined with other approaches:

Fundamental Analysis:

  • Probable Scenarios: Fundamental analysis, which involves evaluating a company's financial statements and health, can provide insights into the most probable outcomes for an investment.

  • Plausible and Possible Scenarios: This analysis can also uncover potential risks or opportunities that might not be immediately apparent, contributing to understanding plausible and possible scenarios.

Technical Analysis:

  • Market Trends and Patterns: Technical analysis, which focuses on patterns and trends in market prices, can help in identifying probable and plausible scenarios based on historical data.

  • Identifying Outliers: It can also help spot anomalies or outlier events (possible scenarios) that might occur under certain market conditions.

Economic Indicators:

  • Macro-Economic Trends: Understanding broader economic indicators can inform probable and plausible scenarios, especially for investments like real estate or bonds.

  • Market Sensitivity: Certain economic changes can lead to possible scenarios, such as drastic market shifts due to unforeseen geopolitical events.

Case Study: Diversifying a Portfolio Using the Model

Consider an investor looking to diversify their portfolio:

  • Stocks (Probable): Invest in stable, blue-chip companies with a history of steady growth.

  • Emerging Markets (Plausible): Allocate a portion to emerging market funds, which have higher growth potential but also more risk.

  • Gold or Cryptocurrency (Possible): Invest a smaller portion in assets like gold or cryptocurrency, which could either significantly appreciate or depreciate in value based on less likely global economic shifts.

Monitoring and Adjusting

An important aspect of using the "Possible, Plausible, Probable" model is continuous monitoring and adjusting of investment strategies based on changes in market conditions, economic indicators, and company performance. This dynamic approach ensures that investors can:

  • React to New Information: Quickly adjust their portfolio if a plausible or possible scenario becomes more likely.

  • Take Advantage of Opportunities: Capitalize on unexpected market movements that could turn a possible scenario into a profitable opportunity.

The "Possible, Plausible, Probable" model is a versatile tool for investors, helping to navigate the complexities of different investment landscapes. When combined with other analytical methods and a commitment to ethical investing, it can form the cornerstone of a robust, dynamic, and responsible investment strategy. By continually reassessing and adapting to new information, investors can use this model to make more informed decisions and build a diversified, resilient portfolio.

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