Over 80% of all individual investors lose money in any given span of ten years. This figure is likely to be higher, given most people’s reluctance to reveal their losses. This article provides a broad outline of this financial landscape. It reflects author’s personal views as an individual investor and author of a stock charting software with experiences learned from University of H.K. (hard knocks). Do not consider this article as any form of financial advice. Financial advice are available from licensed individuals and companies as required by law in your respective country.
Investment is a statistics game. You win sometimes and you lose most of time. To stay ahead, all you have to do is to make sure that your gains are more than your losses. More importantly, how to limit losses and reduce mistakes will be crucial in successful investing.
Take a typical fund manager. Out of ten positions, fund manager may only win 40% of time. Say, this manager makes an average return of 20% for each position. The rest are mistakes, but this manager capped losses at 10% each. Do simple math, and lo and behold, this manager is ahead with gains. This is a simple example – professional fund managers use complex variations of this simple theme.
Another example is venture capitalist. Say, out of ten ventures, only one succeeded. The successful venture could yield returns of 2000%, perhaps more. The other nine ventures failed miserably and these investments are written off. Using this model, venture capitalist is still ahead.
Headlines, media, advertising hype.
Most of us are familiar with this typical headline: “Whiz kid makes stock picks that outperform market than most fund managers”. When such stories becomes headline news on popular media, it is likely that they appear towards end of a great bull market. Stories like these typify misconception that anyone can pick stocks at random and win all time.
Perhaps, a more tantalizing advertisement with “How I make 2600% (annualized) on a winning trade” may make us interested. Any seasoned investor will be able to provide a handful of trades that has spectacular performance like 50% in a week. Annualize this and it works out to be 2600% a year. However such trades are few. There is no one in world that has such a method or strategy that is consistent and sustainable.
It is prudent to treat media reports with a critical mind and skepticism. Rationalizing possible reasons on why story appears may provide some useful and not so obvious insights. For example, if you have a large position in a stock, then obviously you will only sing praises on why it will outperform its peers to encourage more buying momentum. The author remembers an analyst private statement: “I can write fantastic merits about a stock, conversely I can also write some damning things as well”.