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Comment by hellofunk | Hacker News Reader

> If you're right 51% of the time when you invest you're going to get rich.

Sorry, but this is completely incorrect.

The approximate formula for success in investing or trading is "percentage right" * "average win profit" - "percentage wrong" * "average loss" = overall profit.

Many traders are correct only 20% of the time (I'm looking at you, stock options traders) but make fortunes because they understand this formula.

You can also lose a lot of money even if you are right 90% of the time because you fail to manage a big loss properly.

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Can confirm. Been trading options for 3 years, lose money on 90% of my trades, but still up 30% for the year.

It's basic expected value, magnify your wins and minimize your loss to what you know you can lose.

So your counterparty makes money on 90% of his trades and is down 30% for the year? He must feel like a schmuck.

That is not at all how the market works.

Why would there only be one, perfectly symmetrical, counterparty?

And take in mind, most returns are relative to your initial investment, if you reinvest your profits so you have a static % 'at risk' the bad results will hit you harder than the good ones. Lose 50% and you need to make 100% RoI to get back to the start. Win 100% and you only need to lose 50% to get knocked back.

And there are also catastrophic losses, if you play it too risky, where you won't have enough to continue investing after a particular hard hit.

A simplification to explain the main point, which is that it is very hard to beat the market. Even for professionals.

Yes, and you can also be be right most of the time, and have below market returns because of transaction costs or management fees.

This is the big point.

Investment houses don't start from the same place as an index fund. Their returns are penalized from the start due to the fee structure. So not only do they have to beat the market, they have to do it by a sizeable margin before the end user sees a profit advantage.

For a retail investor it is hard to justify not choosing an index fund.

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