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Consistency Drives Returns

3. Under the Microscope - Consistency Drives Returns

Basic Investing & Trading Concepts

  • On my daily post dinner walk (1.25miles, designed to help regulate insulin) my wife and I were talking about trading.

  • We touched on our perceptions of risk and interestingly, we both classify ourselves as too risk averse. However, she is much further along the risk averse spectrum than I am.

  • One of the primary tenants of my early approach to creating wealth was it MUST happen. Ideally, we're able to make meaningful wealth quickly. However, this inherently increases our risk.

  • So my approach sought a balance. I wanted to take enough risk that would yield meaningful wealth early enough but without excessive risk. This prioritized the probability it would eventually occur, over the chance of outlandish success with greater severity.

  • To elucidate the point, let's look at an example:

    • Investor A is risk open, willingly YOLOing (You Only Live Once, aka big bets)

    • Investor B is risk averse, unwilling to accept volatility

    • Investor C is a mix of both. Willing to take risk but not willing to take too much.

    • Most people cognitively would select "C" understanding that it balances qualities from both YET they set expectations and trade like investor A.

    • This is due to a disconnect between our logical processing and aspirations. Frequently, we'll see traders say "I JUST want to make 1% per day". This trader THINKS this is a small return because it's a small percentage. Annualized, this trader JUST wants 3,678.3% return per year.

  • Early on, a small variance in returns seems benign. For example, $100,000 invested for 20 years at 10% yields $623K vs $965K at 12%.

  • However, once we develop our principal, for example $500,000 invested for the same 20 years at 10% yields $3.4M vs $4.8M at 12% return.

  • That 2% variance makes a significant impact on the raw $ figure as our principal compounds. The small details matter.


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