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. PE ratios, Moving averages, Moats, business model don’t matter. Analyzing certainly helps. But they’re 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.
The only difference between those is typically the timeframe.
The important lesson here is you will be wrong. A lot. Even if you think can’t go lower because it’s so cheap. Or it has to go higher because it has all numbers speaking 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 environment.
If the market is more hostile often you’re right maybe 30% of the time or less.
But you gotta except 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 2x bigger than your losses just to break even. and not to lose money. Ideally, they should be 3x larger. Than you’re in a good position.
The goal is to build in failure. 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 at 30% and 3:1 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 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 and 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. PE ratios, Moving averages, Moats, business model don’t matter. Analyzing certainly helps. But they’re 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.
The only difference between those is typically the timeframe.
The important lesson here is you will be wrong. A lot. Even if you think can’t go lower because it’s so cheap. Or it has to go higher because it has all numbers speaking 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 environment.
If the market is more hostile often you’re right maybe 30% of the time or less.
But you gotta except 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 2x bigger than your losses just to break even. and not to lose money. Ideally, they should be 3x larger. Than you’re in a good position.
The goal is to build in failure. 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 at 30% and 3:1 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 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 and 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. PE ratios, Moving averages, Moats, business model don’t matter. Analyzing certainly helps. But they’re 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.
The only difference between those is typically the timeframe.
The important lesson here is you will be wrong. A lot. Even if you think can’t go lower because it’s so cheap. Or it has to go higher because it has all numbers speaking 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 environment.
If the market is more hostile often you’re right maybe 30% of the time or less.
But you gotta except 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 2x bigger than your losses just to break even. and not to lose money. Ideally, they should be 3x larger. Than you’re in a good position.
The goal is to build in failure. 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 at 30% and 3:1 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 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 and not losses.
More on that in the next chapter.
