By "easily" do you mean it happens for some measurable number of small-money participants (of which there are many, of course)?
Or do you possibly mean that you invest in 10 different stocks and one doubles?
This sounds like optimism bias.
There is no basis for returns to "go down as numbers go up", except if you are forgetting to average in the losses when the numbers were small. (Maybe because they are small they don't feel like they "count"?)
> By "easily" do you mean it happens for some measurable number of small-money participants (of which there are many, of course)?
I mean a relatively sophisticated trader, one who actually understands markets and understands where he can take advantage of markets, can achieve very high returns if he takes advantage of his, you could call it 'agile' position.
For instance, it's quite common for a stock to gain 1-2 percent per day, and to go on a 10% rally within a week or two. Let's say I'm bullish on a stock. I'll wait for a 5% or so pullback, then watch it on a down day. I see a dip, I'll buy in. I could be up half a percent by day's end. Then, if I'm right, it'll rally up to 10% within 2 weeks.
If I'm investing an 'optimized' amount (ie. one that's small enough to unload quickly, but big enough to make commissions a no-factor), then I can make money on a half-percent move. I can be happy with 2%, and very happy with 5-10%. If you repeat this enough, and have a batting average of 60% or higher (ie. consistently just over half with a very disciplined strategy), the interest compounds when you sell one stock to buy another.
Let's add up numbers in 2 percent moves, times 10 trades. You wind up at ~122 dollars, or 22% percent up from your original amount. 50 trades, you're at 269 dollars. Over double. 50 trades isn't very much for a dedicated trader, and that's not even what you'd call 'day trading'. Compounding interest and math is fun, eh?
> Or do you possibly mean that you invest in 10 different stocks and one doubles?
That would be stupid. Investing isn't about shooting in the dark and hoping you hit something. It's about optimizing your return through solid principles, and not giving a shit about any single stock.
> There is no basis for returns to "go down as numbers go up", except if you are forgetting to average in the losses when the numbers were small. (Maybe because they are small they don't feel like they "count"?)
Volume is everything when trading. If your position in a single stock is too big, you'll have a hard time loading or unloading a position. When you get into managing large amounts of money, it gets more difficult to get in and out of positions, which affects how much of a return you can make.
I appreciate the detailed reply. I guess I'm naturally skeptical in two areas:
- I don't quite see how you are factoring in the 60% batting average above (seems like it would water your returns down quite a bit from an average 2% "per move"
- I'm not sure how well I believe that a casual trader can bat 60%. That sounds quite generous to me, especially on short-trades.
I think your ability to execute this strategy as high as 60% is going to vary year-to-year as well, although (thinking out loud), maybe this is a good strategy to play in obvious bull (2013) or bear (2009) markets, but not in flat markets (2012), when it's going to be hard to predict the outcome of any given drop or bounce.
> - I don't quite see how you are factoring in the 60% batting average above (seems like it would water your returns down quite a bit from an average 2% "per move"
You're right, I was jumping the gun a little. The average gain is actually a bit higher than 2% (probably 3-5%), and if you're disciplined, you can keep your average loss to a percent or so.
The 2% was a more or less arbitrary number to show some of the math behind it, and that you don't need big gains on one trade to make a lot of money.
> - I'm not sure how well I believe that a casual trader can bat 60%. That sounds quite generous to me, especially on short-trades.
Casual, no. A dedicated retail investor, yes.
I agree with the original post that casual investors shouldn't be in individual stocks, but disagree with the notion that a non-professional can't trade.
> I think your ability to execute this strategy as high as 60% is going to vary year-to-year as well, although (thinking out loud), maybe this is a good strategy to play in obvious bull (2013) or bear (2009) markets, but not in flat markets (2012), when it's going to be hard to predict the outcome of any given drop or bounce.
Well this year has been a bull market, so I've batted 100%. My best trade was a 20% gain in less than a week. 60% is what I'd expect over time, though even 40% is workable if you limit your losses and maximize your gains. I also choose stocks based on their relatively predictable price movements, I stay away from over-publicised stocks that trade wildly based on the news.
Flat markets are tougher, but as long as there's some volatility you have opportunity. Learning how to read technical indicators (various statistical indicators based on price movement and volume) is incredibly helpful.
One word - liquidity. As the numbers go up, it's more difficult to trade since as your transactions become larger there's less potential buyers/sellers at a given price level.
And when I say it's easy, I mean logistically and realistically possible. Few are good enough to make those returns, but it's very possible.
No trader ever expects one stock to double. 5 percent a trade can get you 400 percent a year...
>There is no basis for returns to "go down as numbers go up"
Sorry, but he is correct. If you buy $1000 of a stock, it's a drop in the bucket, it changes nothing. You can buy it and sell it back all day long. Get in quick, get out quick. If a pension fund manager needs to buy $1 billion worth of a stock, the stock's price will have a massive move. It might take weeks or months for the manager to accumulate the required shares. The guy trading $1000 can ride the wave of the fund manager. If the little guy is able to detect that a bigger guy is consistently buying, the little guy can take advantage of that over and over. The bigger guy doesn't have that option to ride the wave of someone bigger.
There are very few investments that will yield 100% in a single year, let alone consistently. If you know of them, let me know, because I need to reallocate my portfolio.
If it was possible, annualized gains from the stock market would be much higher than 7%. If there was a way to consistently get 100% YOY returns on an investment, someone would be getting rich on it. I'd happily pay someone 20% -- hell, 50% -- of the gains if they could get me 100% growth YOY. Instead, hedge funds have actually underperformed the S&P 500 over the past few years.
You are talking about something different (investing). Traders take a smaller amount of capital and earn a wage from it. So a talented trader might take $50k and over the course of a year working more than 40 hours per week, making thousands of trades over the course of the year, make a net profit of $60k. That $60k is not compounded. It pays for rent, food, beer.
Think of it this way:
How much can a trader make on a capital of $50k? Answer: $60k
How much can a trader make on a capital of $500k? Answer: $60k
Not literally, but hopefully that paints the picture.
It really depends how much money you're managing, and whose...
If it's your own money, and it's not a massive amount, you can easily double your money or better every year.
Returns go down as numbers go up, especially when you have clients.