TRADERS´ English I July 2014 - page 22

INSIgHTS
22
07.2014
Profit (De)bunk(ing)
There is no shortage of fisherman’s
yarn in the financial industry.
One way to defuse the excessive
importance we put on returns (after
all the good outcome we are looking
for), is to put them in perspective
on a larger time scale. We present
you Table 1, a table of long term
compound returns. In blue, we have
the average risk free return over
the past 53 years. In red Warren
Buffett’s net worth is shown, while
in green and yellow we have the
GDP of Belgium (a small country)
and the USA (a very large country).
Now that should put it into
perspective, a few of the examples
of great returns. For instance on the lowest row we have
the winner of a one-month guru competition. Simple math
indicates that these examples are highly probably just
plain luck (or fraud) and very likely impossible to be even
an average sustainable return. Another one is a service
stating it is easy to achieve a 200 bucks earning a day on
a 10,000 portfolio. Of course you can’t compound or this
would make too much money, we were told criticising this
scam with the same numbers of Table 1.
Repetitiveness and scalability are key in turning your
traders’ mind around such examples. If something sounds
Being profitable in the long run with trading, and every investing enterprise for that matter, is about cutting
losses and letting profits run. Although this is a hearsay thing of ages, statistical expectancy actually proofs
the saying mathematical. It is not about being right or wrong but handling both profits and losses well.
Source:
F2)
Expectancy Depicted as Scales
So this is what to expect when cumulating profits (given both on a per month as well as a per year base) over ten and up to 60 years. As Einstein put it: “Compound interest
is the eighth wonder of the world. He who understands it, earns it ... he who doesn’t, pays it”.
Source:
return per month
return per year
return over 10 years 100 over 10 years
100 over 60 years
0.21%
2.50%
28%
128
440
0.47%
5.84%
76%
176
3009
1.00%
12.68%
230%
330
129238
2.00%
26.82%
977%
1077
155640877
2.84%
39.99%
2789%
2889
58200000000
3.00%
42.58%
3371%
3471
174904823971
3.13%
44.83%
3960%
4060
447599831447
3.65%
53.70%
7260%
7360
15889960045023
4.00%
60.10%
10966%
11066
183655650658859
5.00%
79.59%
34791%
34891
180424425186733000
10.00%
213.84%
9270807%
9270907
63494091560654900000000000000000
15.00%
435.03%
1921944400%
1921944500 5040168486422420000000000000000000000000000000
T1)
Cumulative Effect of returns
A colleague once tried to convince me of the fact that
it seemed obviously a good idea, at least to him, having
bought shares of a tumbling bank in 2008 a week before
breaking news. Having made a whopping 200 per cent out
of it, he was all confused and surprised by my question, if
it had seemed a good idea at the moment when he made
the decision. Mind the fact that good decisions are not
restricted to knowing what stock to buy. There is far more
important decisions a good trader can make, in the absence
of knowing what the outcome will be. Selling losers before
a mistake turns into a problem is just one of them.
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