Why the numbers don’t lie when it comes to making high returns.
Imagine you were given a million Euros, which used to be a lot of money. Furthermore, assume that you would have to make a 10% return in one year or bad things would happen. If that’s too abstract, just think of a time when you were on Netflix, and you had to reach deep into the older offerings as you have seen all the new releases, twice. In some nineties movie, you are Mel Gibson and someone with a guttural sounding accent, such as Dutch, is holding you to ransom. They have put a gun to your head, whilst using Apple Pay to transfer you said finances, and off you go.
If this sounds too much like How to sell drugs online fast (2019), then you truly have been watching too much TV lately, but the question is: how can we make 100,000 Euros, legally, in 12 months’ time? First, let us look at the options. We can buy the S&P 500 and hope for the best. It’s been annualising what we need for quite some time, but lest we forget what happened this year. Losing 200,000 Euros is clearly not an option for the best Australian export since Mad Max Thunderdome, which can you believe it, was made almost forty years ago?
Can’t buy bonds, can’t buy commodities, can’t buy anything private, as it would take more time to exchange, on both ends, than getting the money to work. We can also forget about the digital asset space, as the tail risks are still too large. That leaves something else, and it is a numbers game. In other words, if making just one investment won’t do the trick, then why not try to do a few more.
Here is how the maths works. Let’s say we think natural gas is going to go up from here, because the war doesn’t seem to be coming to an end. If we gave ourselves a month to pick the right time to open and close a trade, we could make 10%. Let’s say we risk 100,000 Euros, then we would need to make ten winning trades during the course of the year, assuming zero costs and holding everything else constant (I have always wanted to say that).
But of course, we don’t win on every trade. Worse, we also lose money on the ones that don’t work out. Assuming the stop loss is equal to the point of taking profit, means that if we get less than half of our trades right, we lose money overall. Fortunately, this is a movie, and the star has a hairdo that can still surprise us, so say we get 60% of our trades right. That would mean we need to make at least fifty trades to let the statistics work in our favour. We could also increase our position size, and hope we don’t start off losing, otherwise we would have (a lot) less capital to invest. As Dirty Harry would say, do you feel lucky punk? (1971)