The Relationship between Success and Credibility (Part 2)

Last time I began discussion about credibility. Before I proceed to distinguish between losing traders and losing trades, I want to expound a bit on sample size.

I recently found a new Meetup that advertised the following:

     > Organizer/Facilitator is experienced with US stocks
     > and options. He quit his job and invest [sic] safely in
     > Singapore using US stocks for passive income. With
     > 5% monthly returns, he able [sic] to enjoy more time to
     > document his trades, analysis [sic] and exploration.

This raised multiple points of scrutiny for me so I messaged the organizer: “what about 5% monthly returns do you think is not an ‘overnight, get rich quick scheme?'”

I was challenging his notion of “safely.” Plenty of people would be making 60% per year if it were reasonable to do so.

He responded: “nope, because it’s about consistency every month with due diligence done to ensure capital is always safe.”

Rather than target his use of “ensure,” I replied: “calculating returns based on invested capital is meaningless. Anyone can be ‘brave’ and take excessive risk on a sliver of their portfolio. If you succeed and make 5% per month on that then the actual return on total net worth is only a fraction.”

He asked “well if u find it meaningless, how would you calculate your profits from your experience of trading?”

“On a trade-by-trade basis I think it’s okay to use invested capital in the denominator if it is relatively consistent across the set of trades (or if you have a logical plan for dealing with the significant differences when it’s not). For overall performance, though, I think you must divide by total net worth.”

In response, he wrote: “that sounds reasonable as well. 80% of my net worth is traded to achieve my 5%. Remaining 20% I trade on good market condition for other strategies. I don’t really do any day to day trades, so I can only summarize my trade results after 1-2 months for each trade.”

I asked, “5% for how many months?”

He responded, “10% for 2 months averages out to 5% per month.”

There’s our gremlin!

Two months is virtually meaningless as a track record because it is such a small sample size. I discussed in the last post how Mr. Market sometimes allows much longer tastes of success due to no particular trader skill whatsoever. All credibility with me was therefore lost.

As they say on Shark Tank, “for that reason I’m out.”