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  1. #21
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    Quote Originally Posted by Snoopy View Post
    I am not sure I quite got my point about risk of investment plan failure across, so here are the numbers I had in mind. Let's say you devised a leveraged investment strategy that delivered excellent growth per year every year, but with a one in ten chance every year of total capital loss.

    The chances of you holding onto your nicely growing capital for one year is 90% (or a probability of 0.9). But to come out ahead you need to do this for ten years in a row. Because each year of investment is dependent on the results of the previous year (in probability theory this means they are what is termed 'dependent variables'), that means you have to multiply the probabilites together to garner the multi-year picture.

    After one year the probability of holding onto your fast growing fortune is 0.9.

    After two years the probability of holding onto your fast growing fortune is 0.9x0.9= 0.81 (or 81%)

    After ten years the probility of you holding onto your fortune is:

    0.9x 0.9x 0.9x 0.9x 0.9x 0.9x 0.9x 0.9x 0.9x 0.9= 0.349, or approximately 35%

    Or looked at another way you have a 65% chance eventually of losing everything after ten years has elapsed, even though on a seductive one year basis you have a 90% chance of single year success.

    SNOOPY
    Hey Snoopy I did get your point but from a different angle. I was meaning position sizing and risk mangaement is crucial to increase your success rate from 90% to 99%. Therefore your sucess rate after 10 years would be 99%^10=90%.
    You make your own luck.

  2. #22
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    Quote Originally Posted by Snoopy View Post
    I personally find it quite frightening that there are a whole load of investors out there who do not understand the statistical mathematics of this.

    SNOOPY
    Frightening? I find it mouth watering and borderline arousing!
    ----
    Never try to teach a pig to sing. It wastes your time and annoys the pig.
    ----

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