Market Talk with Piranha is currently moving to its new home at The new site is up and running but many of the posts need editing as the images and stock charts did not transfer successfully (thanks blogger). I will post all new entries to both blogs – Thank you for your patience while I make this change!

Tuesday, August 08, 2006

Simple Thinkers

Have you ever been on a message board, forum or in a discussion where a person tells you that earning ‘X’% per month would make you the richest person alive in ‘X’ number of years. For instance, I recently read a post by a forum writer that said:

“If you ever find such an investment you should immediately reinvest all got.

Month 2 you would have $20K producing $20K a month.

By the end of your first year you'll have over 20 millions bucks and at the end of year two you will be by far the richest man alive.”

The question posed earlier in the thread said:
“Are there any ways that could earn $10K per month consistently”

To some people, $10,000 per month is peanuts but to others, it is a large sum of money; something so inconceivable that they bark about all the reasons why making this type of money is impossible. To be honest, it's only $120k per year; not that impressive in New Jersey anymore!

What struck me the most about this post was the fact that the responder was using such elementary thinking when answering the question. By using proper money management techniques, an investor would never risk their entire stake on one investment because it was returning a specified amount or percentage each month. If I am trading with a positive expectancy system that is averaging a return of $10,000 per month, why would I double, triple or quadruple my risk just so I could make more money. Non-investors are always thinking about the up-side potential and never worrying about the downside. Maybe the person earning $10,000 per month has formulated a system with positive expectancies and a quality position sizing technique that allows them to make this sum without risking too much of their original capital.

If the investor were to double the size of their bet or increase it even further, they run the risk of ruin on one bad transaction; therefore, becoming the richest “person” in the world in not an option by doubling-down the size of the specific bet or business strategy. It sounds to me that the person responding to this post is a roulette player that believes that doubling each bet after a loss will allow them to break even which couldn’t be further from the truth.

Be aware of the “talkers” on the web and don’t buy into everything they say because much of the crap I come across is that: “crap”! Just because someone has an investment strategy that pulls in $10,000 per month does not mean it is as simple to double up on the original investment in order to bring in $20,000 per month and then repeat the process to bring in $40,000 per month (eventually making you the richest person alive in a few years). I highly doubt the responder in this post has ever studied probabilities, risk, reward, expectancy or any other mathematical logic before giving his two cents. I will also assume that he is the type of investor (or gambler) that always has a hot tip and will bet the farm on that tip because he sees the potential of profit on the other side of the fence rather than the possible loss (risk of ruin) by risking too much.

Try out this logic: Ask 10 friends or family members which situation they would choose if given the opportunity:

  1. Risk 90% of their net worth for a 5% chance of multiplying it 50 fold
  2. Risk 1% of their net worth for a 70% chance of doubling it.

What would you choose? And Why?

I think many of you know which number I would select based on my past blog entries and my investing style.

Steer clear of internet TALKING HEADS & SIMPLE THINKERS!

If you are interested in reading high quality material on the web, take the time to visit my blogroll and links section on each sidebar. No talking heads here!

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At 11:21 PM, Anonymous Terry Zink said...

I like this thinking; since learning to trade I have discovered that when investing, it is more important to minimize the damage when you are wrong as opposed to maximizing gains when you are correct.

As speculators, we need to be conscious of the fact that we can be wrong and when we are, we have to be sure we are not hurt too badly.


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