Forewarned is forearmed

• abnormalreturns
• March 3rd, 2010

In our last couple of posts we discussed taking responsibility for your own trading decisions and the dedication the very best investors demonstrate toward their craft.  Both of these posts highlight the challenges facing investors and traders alike.  Before embarking on a sojourn into trading we need to realize the odds are stacked against success.

Carl Richards at the Bucks Blog notes how using small sample sizes can get us in trouble when it comes to investing.  Investors oftentimes focus on their own experiences rather than relying on larger, and more statistically valid, samples of investor returns.  Richards writes:

Forming our sense of the future based on our own limited experience is just part of being human. But when it comes to investing, this wiring leads to some major mistakes..So next time you’re thinking about making a major change to your investment strategy, try expanding your sample size and looking beyond your own limited experience. Remember, just because it was sunny on top of the mountain last time doesn’t mean it will be this time.

Mark Hulbert at Marketwatch adds some additional data by which we can assess the probability of success of an active investor.  Hulbert notes that more money has been flowing into passively managed funds over time, due in part to the inability of mutual funds to outperform the market.  In regards to the newsletter writers Hulbert follows, he writes:

My three decades of tracking investment advisers has shown that, over long periods of time, about one out of five advisers are able to do better than simply buying and holding an index fund. While that means it isn’t impossible to outperform the market over the long term, the odds are stacked against us.

The point in all of this is not to dissuade anyone from becoming an active investor, or taking it to the extreme, a full-time trader.*  It is helpful to recognize that many other people have tried, and failed, to do what you are trying to accomplish.  Hopefully this gives you some sense of the tough task ahead of you.  As they say, “forewarned is forearmed.”  Consider yourself warned.

*For an interesting discussion of what it takes to be a full-time trader check out this post by QuasiD at Tickerville who discusses the capital requirements (and required return) a trader needs to make a serious go at trading full-time.

Abnormal Returns is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small commission, yet you don't pay any extra. Thank you for your support.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus