No. of Recommendations: 3
The relationship I'm suggesting is that most investors will successfully achieve modest returns, but only few investors will achieve outlierly high ones.

What about people who achieve spectacularly low returns, like -99%?

I'm not kidding.

The "expected distribution of returns" is one of the key areas of study in economics.

Obviously you can't lose more than 100%, and your potential gain is unlimited.

I assume most people have heard of the "normal distribution" also known as the bell curve. It predicts things well for linear processes (e.g. sum of several die rolls) but not as well for geometric processes.

One distribution that fits geometric processes well is the Lognormal distribution (the logarithm of the return is normally distributed). Looks something like:

|
| ...
| .. ..
| . ..
| . ...
| . ...
| . ....
| .
| .
|.
+-----------------------

A very few people lose it all, most people perform in the average range, and a very few people do spectacularly well.
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement