Thursday, January 5, 2012

Is investing hard?..........Part I

I have not been dwelling in investing philosophy for a while. Wish to make one or two more entries, the so called popular by demand, before I move on to some other themes.

I made a statement that good investors are made, not born. For many of you who are in managerial positions, it's the same question, are good leaders made or born? To make it sounds even more text book-ish, is it nature or nurture?

To be even more screw up, let's talk about statistics.

In a natural distribution curve, in relative terms, most of us will fall right in the middle. Finding the extreme end of IQ 55 or 145 will be extremely difficult. If you don't have big enough sample size, you can't even find closer to one. You can only find rough about 1 in 1,000 people.

Let me go back to investing. Let say the super-investors can generate annual compound rate of return roughly about 20% and the super-idiot-investors will also generate about -20%(NEGATIVE 20, make sure you don't mis-read that), the big majority will generate about 0% return? A large percentage of will make money and a large percentage will lose money? You must be feeling very positive now that you can make money out of stock markets. From the normal bell curve, you must be thinking that you have 50% chance making positive return. 50% is a very good chance, so obvious right? You must be feeling very warm now.

You see I already fooled you into cognitive bias. I borrowed a concept that is so intuitive, so familiar, so logical yet so flaw? Eeeeerrrrrr. How?

According to many studies, this is how it is supposed to look like.

Only 10 in 100 will make money. We have not even talk about time horizon. Over 1 year, 5 years, 10 years, 20 years, 30 years? Try to stay above zero return over 5, 10, 15, 20 years. Do you have confidence of doing that? If not, put your money in fixed deposit?

I know many of my readers eat, sleep, shit and breath, not in oxygen, but in stocks. They are good enough to stay above ground ZERO, but can you at least beat FD rate over 10, 15, 20, 25, 30 years? My gut feel is may only 7 out of 100 can do that.

Then there are a few of my readers, who do not depend on luck, but something else(eeerrr don't know what) can at least beat the EPF number of 4.5%. 5 of out 100 can do that.

Then there are about 3 - 4 out of 100 can compound above 10% over a long period of time. The time period that I am talking about is 20 to 30 years.

May be 1/100 person above 15%.

And may be 1/1000 person above 20%, that person will be crown as a super-investor. Let me help you to visualize this.

Hey, I am seeing your aspiration is evaporating fast. Don't be like that lah. Investing is easy, very easy in fact. But to be in the club of 5-100? Try 5100 in coming 4D. :)

No comments: