This translation has been automatically generated and has not been verified for accuracy.Most investors are aware that patient buy and hold portfolio strategies offer far better odds of success than a casino bet. In proving this mathematically, however, the Of Dollars and Data site offers an important insight into the process of successful investors.by calculating the odds of success in a typical bet in roulette. On a typical 38-space roulette wheel there are 18 red spaces.
The article goes on to show that because the odds of the Dow Jones Industrial Average closing positive on any given day is 52.3 per cent, the probability of making profits converges to 100 per cent for longer time periods like 20 years.I want to focus on the formula for expected returns. In basic terms, it’s merely the amount of money at risk, multiplied by the probability of success, minus the probability and extent of a potential loss.
Investors rarely calculate potential loss in my experience, but it’s a vital part of the investment process. Assessing, for instance, the potential price decline for a market-leading stock if it falls to the average price-to-earnings ratio for the sector can stop an investor from taking a big loss. Assigning probabilities for gains or losses on individual investments is, of course, far from straightforward. The good news is that investors can practice using the formula without buying the assets involved, and over time become more accurate.
The most successful investors only risk their assets when the odds are in their favour. The formula presented by Mr. Maggiulli, by providing the means to assess likely risks and rewards, can put all investors on the path to success.This is the Globe Investor newsletter, published three times each week.