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Is this a really secret of Stock Market?

  1. Oct 14, 2009 #1
    Dear Fellow Traders,

    Everyone related to Stock Market is always focused on the goal of how much they can make buying/selling a stock, they forget to concern themselves with how much they risk loosing. Is it true that “The secret to great wealth in the stock market, is not big gains; its small losses”

    Is this a strategy of keeping losses small? If we will win only 1 out of 3 times with our losers loosing 5% and our winners gaining 25% we can make extremely large profits. That’s do the math assuming that there is only 1 out of 3 winners. So if we make 9 trades of USD10,000 each in one month it means we will loose money on 6 and make money only 3. the 6 losers will cost us USD3000 (6*5% loss on each of USD 10,000 Trades) and the 3 winners will net us USD7500 (3*25% gain on each of USD 10,000 Trades) for a profit of USD 4,500

  2. jcsd
  3. Oct 14, 2009 #2


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    Where do you get the idea that "Everyone related to Stock Market is always focused on the goal of how much they can make buying/selling a stock, they forget to concern themselves with how much they risk losing"? The great majority of stock is held by banks, trust funds, and retirement funds. They concern themselves, almost solely, as they are often required to by law, with maintaining their value, not making great profits. In fact, the great majority of the trading in the stock market is done very conservatively.
  4. Oct 14, 2009 #3


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    Where does the "extremely large profits" come in. If you make 9 $10,000 dollar investments, you've invested a total of $90,000 and received a profit of $4500. That's a 5% profit - which is pretty good, even if not "extremely large" - and it is the real secret to the stock market. Investing conservatively in a market that always increases always returns a decent profit (of course, as we all know all to well, there is no such thing as a market that always increases, but investments do increase in the long term).
  5. Oct 14, 2009 #4


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    I think this is the "secret" to making money for all forms of investments that carry risk. When I was a student I made some extra money by working at a racetrack . It was quite clear that the small number of gamblers that actually make a profit (usually professional gamblers that also spend a LOT of time on preparations) do so by betting relatively large amounts of money but spreading the risk in such a way that when they win (which is quite often because of the way they bet) they make a profit of say 10-20% (often bet to place on several horses).
    Of course they also lose sometimes but on average they make some money every day. From what I was told many of them make a profit each month that correspond roughly to an average salary, i.e. none of them ever get rich.
  6. Oct 14, 2009 #5
    The strategy of "minimizing losses and maximizing gain" is a very sound one. Among other things, it helps create profit (rev > costs).

    That said, I think there are a few flawed assumptions in your comment.

    Like Halls said,
    is a rather blanket statement. Furthermore, in terms of the traditional "stock market", how much someone risks losing is a known, easily quantified number: it's the amount of $ you pay for a stock. If I pay (not borrow) $300 for a share of Google, if it hits zero, well I'm out $300 (plus trading fees) and that's my worst case scenario.

    Options are more to the point regarding risk, but a different, longer story that I don't understand.

    I see two fundamental problems with your scenario:

    1) I think you are confusing calculable probability found in casino settings (for example, what Nassim Taleb calls "ludic probability", or something like that) with stock forecasts. The kind of probability that you are talking about is not found in the stock market (in such a way that you could ever pick 3 "winners" and 6 "losers" beforehand). Maybe all 9 of your stocks go down, maybe all 9 go up.

    Unless you invest in some complicated combination of limits and ETFs, there's no way to assure that kind of hedging in the regular stock market that I know of - a professional trader or more knowledgeable person, please correct me if I'm mistaken. There might be such a hedging strategy in options trading. In the bond market, you can generally fix your % yield - but that's uncertain too and varies according to perceived risk (which itself is uncertain). The point, I guess, is that you can always fix your % losses by placing limits or hedging, but that doesn't provide a 1-to-3 winners-to-losers ratio (or any type): all it does is limit your downside exposure. I think it's hard to lock in a certain % profit in the general market, perhaps easier in fixed income investments (like dividends, bonds, or some options strategies).

    If all 9 of your stocks go down, then you can control how much you lose, but - unless you can control the market each month - you can't control how many stocks go up to counterbalance your losses. You can give yourself more upside exposure, by betting smaller amounts on "riskier" propositions, but that doesn't give you any sort of fixed ratio.

    All that to say, to fix your ratio in the way you're thinking, you'd have to know the odds ahead of time - which the stock market doesn't give you, but a casino does [and they're not that lucrative] - and bet enough times to iron out the random fluctuations to get close to those odds (which is usually prohibitively expensive). Beyond that the best you can is limit your downside risk and, like the others have said, do your homework and look for more payoffs than losses.

    2) The 2nd problem is that, in looking for a few big wins that offset multiple losses, you either have to increasingly bet on riskier propositions (which you said you want to avoid) or make smaller, consistent bets on the lower payout, more expensive, higher likelihood bets, while consistently betting small amounts on cheaper, very large longshots. Markets/bookies try to make "risk" - in a traditional sense - correspond to "reward" or "payout". Whether or not they do a good job is a different question. That's why longshots are cheaper but pay out more.

    So when you speak of any strategy that can regularly bring in 25% profit in one month!! - or a steady over-300% annual yield (US banks are yielding something like ~ 1 + 2%?) - that's akin to expecting your long shots to pay out every month. They don't. If they did, they wouldn't be long shots. What is more likely and is along those same lines is a longer strategy of more smaller gains to smaller losses with multiple long-shot payouts tossed in at random to boost your overall return to something approaching 25%. That's doable, but it's also a difficult and impressive feat - and it has a lot to do with luck as well as doing your homework.

    Sorry for the long post, especially since I don't invest in the stock market :blushing:

    Here's an appropriate quote for this topic and this month:

    "OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."

    Mark Twain, Pudd'nhead Wilson's Calendar

    Good luck!
    Last edited: Oct 14, 2009
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