A beginners guide to a Monte Carlo strategy.

A Monte Carlo strategy is like being a casino. The house always wins because it can calculate the odds of winning and set the payouts accordingly.

Financial markets are far more complicated than random dice and card games. Most people have heard of chaos theory, the idea that a butterfly can cause a hurricane. Likewise a small change in assumptions, can have big impacts on a valuation model.

Since it is impossibly complicated to factor all of these variables into a model. The solution is to simply run the a valuation model thousands of times using different variables. Then by looking at the distribution of valuations calculated you have an idea of the most probable fair value of the asset.

The downside of this strategy is that it requires immense calculations. So unless you have the software you are unable to take advantage of this strategy. However, you could do a simplified version with just a good, bad, mediocre group of assumptions.