Fundamentally, investing is all about making more than you lose.
Nothing else matters.
This is what so many investors get wrong. Either they think it’s all about finding cheap companies or the hottest stocks. P/E ratios, moving averages, moats, and business models don’t matter. Analyzing certainly helps, but it’s not enough.
It’s about how much you make when you’re right and how much you lose when you’re wrong.
This is true for day traders and long-term investors alike.
The only difference between them is typically the timeframe.
The important lesson here is that you will be wrong. A lot. Even if you think it can’t go lower because it’s so cheap, or it has to go higher because all the numbers speak for it, you’ll be wrong most of the time.
In fact, you should assume that you’re right at best 50% of the time. I mean, Michael Jordan missed half of his shots too.
This can happen in the best kinds of market environments.
If the market is more hostile, often you’re right maybe 30% of the time or less.
But you’ve got to accept that mistakes are part of the game.
A good way to visualize that is this table.
It shows the relationship between win rate and the risk-reward ratio.
Let’s assume you’re right 30% of the time. Your winners need to be more than twice as big as your losses just to break even and avoid losing money. Ideally, they should be three times larger. Then you’re in a good position.
The goal is to build failure into your strategy. Having a 50% win rate works sometimes but, on average, is unrealistic. So your strategy needs to cover the worst-case scenario. That’s why starting off with a 30% win rate and a 3:1 risk-reward ratio is a good start. Of course, this can be adjusted down the road. But if you don’t know where to start, start here.
What does this mean in practice?
You don’t know how far your winners will run. Sometimes it’s 10%, sometimes 20%, or in exceptional cases even 100%, 200%, or more.
What a lot of investors get fundamentally wrong is thinking all they have to do is buy and hold. Now, this is not entirely wrong. But here’s what’s missing: you want to buy and hold winners/profits, not losses.
More on that in the next chapter.
Fundamentally, investing is all about making more than you lose.
Nothing else matters.
This is what so many investors get wrong. Either they think it’s all about finding cheap companies or the hottest stocks. P/E ratios, moving averages, moats, and business models don’t matter. Analyzing certainly helps, but it’s not enough.
It’s about how much you make when you’re right and how much you lose when you’re wrong.
This is true for day traders and long-term investors alike.
The only difference between them is typically the timeframe.
The important lesson here is that you will be wrong. A lot. Even if you think it can’t go lower because it’s so cheap, or it has to go higher because all the numbers speak for it, you’ll be wrong most of the time.
In fact, you should assume that you’re right at best 50% of the time. I mean, Michael Jordan missed half of his shots too.
This can happen in the best kinds of market environments.
If the market is more hostile, often you’re right maybe 30% of the time or less.
But you’ve got to accept that mistakes are part of the game.
A good way to visualize that is this table.
It shows the relationship between win rate and the risk-reward ratio.
Let’s assume you’re right 30% of the time. Your winners need to be more than twice as big as your losses just to break even and avoid losing money. Ideally, they should be three times larger. Then you’re in a good position.
The goal is to build failure into your strategy. Having a 50% win rate works sometimes but, on average, is unrealistic. So your strategy needs to cover the worst-case scenario. That’s why starting off with a 30% win rate and a 3:1 risk-reward ratio is a good start. Of course, this can be adjusted down the road. But if you don’t know where to start, start here.
What does this mean in practice?
You don’t know how far your winners will run. Sometimes it’s 10%, sometimes 20%, or in exceptional cases even 100%, 200%, or more.
What a lot of investors get fundamentally wrong is thinking all they have to do is buy and hold. Now, this is not entirely wrong. But here’s what’s missing: you want to buy and hold winners/profits, not losses.
More on that in the next chapter.
Fundamentally, investing is all about making more than you lose.
Nothing else matters.
This is what so many investors get wrong. Either they think it’s all about finding cheap companies or the hottest stocks. P/E ratios, moving averages, moats, and business models don’t matter. Analyzing certainly helps, but it’s not enough.
It’s about how much you make when you’re right and how much you lose when you’re wrong.
This is true for day traders and long-term investors alike.
The only difference between them is typically the timeframe.
The important lesson here is that you will be wrong. A lot. Even if you think it can’t go lower because it’s so cheap, or it has to go higher because all the numbers speak for it, you’ll be wrong most of the time.
In fact, you should assume that you’re right at best 50% of the time. I mean, Michael Jordan missed half of his shots too.
This can happen in the best kinds of market environments.
If the market is more hostile, often you’re right maybe 30% of the time or less.
But you’ve got to accept that mistakes are part of the game.
A good way to visualize that is this table.
It shows the relationship between win rate and the risk-reward ratio.
Let’s assume you’re right 30% of the time. Your winners need to be more than twice as big as your losses just to break even and avoid losing money. Ideally, they should be three times larger. Then you’re in a good position.
The goal is to build failure into your strategy. Having a 50% win rate works sometimes but, on average, is unrealistic. So your strategy needs to cover the worst-case scenario. That’s why starting off with a 30% win rate and a 3:1 risk-reward ratio is a good start. Of course, this can be adjusted down the road. But if you don’t know where to start, start here.
What does this mean in practice?
You don’t know how far your winners will run. Sometimes it’s 10%, sometimes 20%, or in exceptional cases even 100%, 200%, or more.
What a lot of investors get fundamentally wrong is thinking all they have to do is buy and hold. Now, this is not entirely wrong. But here’s what’s missing: you want to buy and hold winners/profits, not losses.
More on that in the next chapter.
