The Odds of YOU Making Money in the Stock Market

Trading vs investing. Technical analysis vs fundamental analysis. These school of thoughts actually mean nothing if you can’t put a figure into it to know which one is the better way to make money in the stock market. And honestly, I don’t want to tell you which one is better. I’ll just tell you how I arrive at my conclusion after much thought on the matter.

I used to trade. But when I read Ben Graham’s book, the Intelligent Investor, its like God speaking to me. Its like being called by God and so I followed him. But in all seriousness, it all makes sense to me that’s why I dumped trading. But that is after I thought about the odds of me actually being a success in either trading or investing. So here’s how it goes for me…

The Odds of being a Successful Trader

First let’s define what a successful trader is. Most people who might attended trading seminars, may think that the speaker is a success. “Why the hell are they speaking if they weren’t?” – may be what you’re thinking. But its true. You don’t have to be a success to be a speaker.

A successful trader, at least for me, is someone who can beat the index using his trading strategy. Its simple. Its direct to the point. Now, what is the odds of you, turning into a successful trader? Not much.

Research says that there’s 95% chance that you’ll lose money by trading. This is in general, not knowing what kind of strategy you are using. That’s basically just like any other business you can put up. And it does not stop people from trying. It only means there’s a 5% chance of success and 95% chance of failure. Not a very good odds. That’s probably why there are more trading seminars than there are investing seminars. The speakers realized they would probably make more money selling seminars than trading their own money. As more traders fail, they turn into teachers that teach others how to trade. I’m sure there are successful traders, its 5% remember? The odds are just NOT in a trader’s favor.

Is there anyway you can tilt the favors even more though?

The Odds of Being a Successful Investor

The other side of the coin is investing. A successful investor is someone who can beat the market (or index). The odds of that happening is around 25%. It is said that 75% of all fund managers can not beat the index. So there are actually 25% of people who are beating it, who are investors. These numbers are in the US… In the Philippines, its probably a lot smaller and would probably near the same as the trader which is around 5% to 10%.

But on the bright side, investors actually came up with a strategy to be (somewhat) successful without having to do any work and be in the 25% of the investors which are a success (emphasis on somewhat). Its called index investing. You won’t beat the index, but its close enough, you’ll just copy it. Its a good strategy.

But if you’re picking your own stocks a failure rate of 75% is still high. And in the Philippines, a failure rate of 90% picking your own stocks is probably reasonable.

Tilting the Odds Even More

With 5% success as a trader. And 25% success as an investor. You can already see which has better odds. You just have to dive in and see which of the 25% successful investors you can imitate to get the same success. You can still go trading with 5% success rate. Maybe there are strategies that are good inside those 5% of successful traders that you can copy and learn from. That would be hard. As most traders won’t show their records. I wonder why? wink* wink* But for me, the only list which are good as proof are the people in the billionaires list. There’s a lot of investors in there and not a lot of traders.

This is not to say that I’m aiming to be a billionaire. All else being equal, there’s a lot more investors in the list than traders means there’s a high chance that investors become successful because of investing, rather than trading. Those are your proof. Investors outnumber traders in the list.

Now there are ways to do investing. There are many strategies that you can use. And many practitioners who have their own strategies. You just have to dig in more and select the best strategies to improve your odds. And hopefully pick the one that compliments your personality. For example, strategies of Ben Graham has been proven to increase such odds. If you became his student when he was alive, you might have 90% chance of being successful. As most of his students, known and not known, have become successful investors beating the index left and right.

Having learned from successful investors is not a guarantee that you will become like them. That’s how odds and chances work. There’s a possibility of failure and success. You just have to be rational always and think in probabilities. And of course, hard work and dedication, the usual stuff.

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