10 bagger vs trading

Just a quick note today to discuss something that has been on my mind lately as I refine my style of activity in the market

I notice there is a perception amongst many ASX participants at the speculative end of the market that a 10 bagger is the holy grail and chasing anything less than bags is a waste of time or taking on too much risk for too little return.

Now before I go any further, don’t get me wrong, I like everyone else would be more than happy to hit a 10 bag run and there is a sense of euphoria about being part of a story that has such a monumental move and wealth creation effect, but is it as important as some may believe?

Let’s start by looking at the example of Investor A who looks for 10 baggers. We will assume a $100k portfolio split equally into 5 stocks at $20,000 a piece. Let’s say that this punter has a fairly reasonable stock picking record and better than average capital protection. They hit a 10 bagger on 1 of the 5 stocks and average 20% downside on the other 4 stocks. They hold the portfolio on average for 18 months. In 18 months time they have $20k x 10 + $80k x 0.8 = $264,000 or 164% return. Sounds pretty good right?

Let’s look at the flipside story of Investor (Trader) B. We will assume the same $100k portfolio. We will assume that this trader can run 4 positions concurrently and uses $20k at a time. $20k will remain in cash to allow for opportunities to be taken as they arise. Let’s say this trader has a 55% win rate, average win of 15%, average loss of 7.5%, and average hold time of 2 weeks. This means the trader cycles 26 x 4 = 104 positions per year.

The expected return per trade is 0.55×0.15 -0.45×0.075 = 4.875%.

This means that in a 12 month period Investor B would return $20,000 * 104 * 4.875% = $101,400. Over 18 months this becomes $152,100 for a total balance of $252,100.

It might surprise some how similar this result is to that of landing a 10 bagger plus having a few plays that don’t quite come off.

What’s the moral of this piece? Essentially it is to find your own way in the markets and leverage your own strengths. Don’t let others tell you that there are right or wrong ways to do things. There is room for many different styles to make money as long as you have a plan!

4 thoughts on “10 bagger vs trading

  1. Thank you for sharing such valuable information that normally takes someone lots of time/money/pain to learn. Basically one has to find one’s edge in the market and knowing thyself is essentially the way forward in the market.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s