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Success in Investing and Trading Depends on the Exact Same Thing
I came across an interesting item in the news this week. Fidelity -- he massive mutual fund giant -- did a survey of the best performing customer accounts. Guess which accounts made the most money? The ones where the customers literally forgot that they had an account open.
Now you can make all the jokes you like about this, but the Fidelity study confirms once again that the key to successful investing is simply time. We know that the single most successful investing strategy ever devised is dollar cost averaging into a low cost diversified portfolio of equities. As long as stocks continue to have positive drift -- that strategy will beat 99% of hedge funds out there.
The reason this is true is that in investing you are simply playing the law of large numbers with time. If you hold an asset for 1 minute you chance of making money is approximately 48% (due to transaction costs) if you hold it for 10,000,000 minutes (about 20 years) you chance is 95% or better. The law of large numbers is the single most powerful force in making money.
Now the irony of the matter is that the exact same principle applies to trading. All of us have this ridiculous fantasy of sitting on beach, sipping a cool drink and leisurely making one or two killer trades from a smart phone that rake in thousands of dollars. If this is your idea of trading -- you will never make money. The “suave rico” approach to capital markets is a fantasy that you must wipe out from your mind,.
The fact of the matter is that if you want to succeed in trading you have to trade a lot. Most retail traders make two fatal mistakes that doom them to failure. They trade with leverage and they give up after three losing trades.
Want to know how many trades you need to make in a year to have a reasonable chance of success as speculator rather than an investor?
If you want to have a reasonable chance of making money you need to make between 500-1000 trades a year in order to mitigate all the typical challenges of trading in speculative markets (slippage, gaps, news bombs etc.) The bottom line is that if you trade you will be wrong a lot. Sometimes your strategy could have 5, 6, 7 stops outs in a row.
We have a killer new strategy at BK that is really making bank in this high volatility market, but I am not naive enough to project this run into perpetuity. I have studied the backtests and I know that the drawdowns will come. The difference however, between losing and winning in trading is to allow that law of large numbers to work for you.
So in essence, successful investing and successful trading are one and the same thing. In investing you accumulate as many minutes of exposure to the market as possible. In trading you do as many trades as possible and let the law of large numbers lead you to profit.