Investors use all kinds of indicators to help them make decisions. Economic data, charts, ratios and even tea leaves. I keep a close eye on valuation metrics such as price-to-earnings multiples and credit spreads, as well as measures of investor sentiment.

Unfortunately, none of these tools work all the time, which raises the question: If they’re fallible, are they valuable?

Investing is tough in this regard. You can do the research, assess all the variables and still get a bad result. The stock goes down and never recovers, or the fund underperforms for years. Similarly, you can do no research and be rewarded. A tip from a friend works out even though you know nothing about what you bought.

With the WNBA season heading into the playoffs, I’ll reinforce the point with a basketball analogy. A player can take a high-percentage shot and miss or a low-percentage shot and make it. The outcome doesn’t make the missed shot a bad decision or the made shot a good one. Over the course of a season, teams taking better shots win and players hoisting hope shots end up on the bench.

Successful coaches and investors focus on what they can control. They put the odds in their favour and let randomness and luck even out over time.

One-offs

Doing this means pursuing a strategy in which the odds get better with time, as opposed to deploying many one-off tactics, each with a lower chance of success. Many indicators fit into the latter category. Win or lose, the odds are no better the next time.

Betting on what the stock market will do each day is a coin toss. Markets are up about 50 per cent of the time, down 48 per cent and flat 2 per cent. It’s the same lousy odds every day. But if you base your strategy on what stocks will do over 10 years, your odds approach 100 per cent.

Similarly, it’s great if you get an economic call right (hard) and predict how the market will react (harder), but it doesn’t make the next call any easier.

Day trading and short-term strategies generally depend on one-of indicators such as interpreting a piece of news or searching for price momentum on a chart – things that might affect a stock price minute by minute but have no impact on a company’s ultimate success.

Like fine wine

Fortunately, investors with longer time frames can look to more concrete indicators that will affect outcomes – things that have no predictive value in the short term but, given time, increase chances of success.

Stocks for the long term: The most obvious example of ever-improving odds is owning stocks. The evidence is overwhelming – stocks beat bonds and GICs. It only works, however, if the time horizon is years, not days, and you stay with it through all types of markets. Getting in and out quickly reduces the odds back to those of a coin toss (or worse if emotions are running high).

Valuation: For a good company to be a good investment, the price paid must make sense in the context of future profits and dividends. Similarly, higher-yielding bonds only make sense if the additional income fully compensates for the increased risk of default.

Capex cycles: For cyclical industries, I keep an eye on the level of capital investment. When everyone is building factories or mines, excess supply and lower profits are on the horizon. Conversely, when times are tough and companies are pulling back on capex, the outlook for investors gets more interesting.

Cost: And you shouldn’t forget about the most controllable variable of all. The cost of investing is part of the equation for determining what you’ll have to spend in retirement. When it comes to trading commissions, fund fees and adviser compensation, don’t pay for anything you don’t need or aren’t getting.

At the beginning, I mentioned investor sentiment. It fits in between the two categories. It isn’t fundamental to a business’s success, nor is it a precise timing tool, but knowing how greedy or fearful investors are puts other indicators in perspective. Are you getting swept up in the narrative or sticking to strategies that have the best chance of success?

One of my favourite television ads starts with Michael Jordan saying, “I missed more than 9,000 shots in my career.” Like the greatest baller of all time, investors will have bad outcomes. It’s inevitable. The best way to deal with fallibility is to first accept that not everything will work out. Then, focus on taking high-percentage shots.