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Tuesday, 10 May 2011

I don’t want percentages; I want money!


4 years ago, my Romanian boss in Shanghai went for a business navigation course. I like this “navigation” word – it sound a lot better than business steering or financial control.

Anyway, he came back and tested his new skills on me.

He asked: “Jared, what pay raise you would like to have this year?”

Unwittingly, I uttered with glee: “50% thank you very much!”

My boss then scribbled 50% on a piece of paper and handed it to me: “There you go. You got what you asked for!”

There and then, I had my moment of “enlightenment”.

I muttered….. “Boss, I should have asked in terms of how much I want in HKD dollars right?”  (Since RMB is not fully convertible, our contract is normally written in HKD or USD)

You should see the smile on my boss’ face.

Percentage is just a statistical tool. But what we really want when investing or trading is MONEY!

And it’s important we don’t lose track of this. For focusing too much in percentages can get us into unnecessary competitive and mental traps……


Apples and oranges

1)  Leverage

Investor A got a 10% per annum return without leverage and is happy.

But he got upset when his colleague got 50% per annum return…..

What if his colleague had used 5 to 1 leverage? And if his colleague had used 10 to 1 leverage, on a risk adjusted basis, investor A’s return is much more superior! Can you spot the difference?



2)  Time frame

Noticed when we started out trading in our first year, our percentage returns per annum is quite high? Exceeding 20% per annum?

Have you wondered why if an investor/trader can consistently return 20% compounded annually for 10 years, he/she is regarded as a market wizard - ala Warren Buffet, Peter Lynch, George Soros, etc?

Yes! Just like a swallow does not a summer make, so goes comparing investing/trading returns.

Sometimes we confuse beginner’s luck with superior consistent performance......

With a short time frame, all of us can produce fantastic returns in percentages!



3) Level of capitalization


Once again, have you seen the posted testimonial returns from students of trading seminars? They can go up till 1000% returns in one month!?

What if I say the 10 bagger in one month is based on capital of SGD1, 000?

To “throw” SGD1, 000 in a heavy leverage “bet” with 10 to 1 payoff is one thing, but would you do it with SGD100,000 capital?

That is also why – all things being equal - smaller funds tend to outperform bigger funds.

Of course we can trade big capital the same way with small capital, but I am ever mindful of the sad ending of one of my favorite trading guru – Jesse Livermore. He blew his brains out. Anyone remember Nick Leeson?


Race against yourself

So next time you are discouraged by comparing annual returns, remember that high returns go hand-in-hand with high risks. In these “challenging time”, should we be maximizing returns by being fully invested? Or should we take some money off the table by “protecting” our profits?

Sell in May and go away?

Percentage is just a tool.

Ask how much we’ve made in MONEY terms. And then compare it with our annual salary. If our investing/trading returns exceed our annual salary, what are you waiting for?  

2 comments:

  1. "Ask how much we’ve made in MONEY terms. And then compare it with our annual salary. If our investing/trading returns exceed our annual salary, what are you waiting for?"

    Yalor. That is what I set for my yearly performance target from making money from the stock market i.e. XX% of my gross annual salary

    ReplyDelete
  2. Yes CreateWealth8888,

    I've learnt much and gain a lot of inspiration from your blog.

    We do share a lot of common grounds. Although one thing I differ is that I do believe in the judicious use of leverage :)

    ReplyDelete

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