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Imagine playing a game for money in which marbles are drawn out of a bag and then replaced. 60% of the marbles are white. If one of the white marbles is drawn out, you win whatever you risked. The other 40% are blue. If one of the blue marbles is drawn, then you lose whatever you risked. This game has an expectancy of 20¢. That is, over a large number of trials, you’ll make 20 cents for every dollar you risk. That means it’s much better than any game you’ll ever play in Las Vegas. But what percentage of the people who play it make money?

[Van Tharp has] introduced this game numerous times in talks given at seminars and conferences. Typically, [they] don’t play for real money, but the winner (i.e., the person who ends up with the most “money” after 50 trials) is given a prize. The results at a typical talk are that one third of the audience ends up broke, another third of the audience loses money, and only a third of the audience makes money. And these results are not unique.

Ralph Vince, author of three books on money management, allowed 50 Ph.D.s who knew nothing about money management or statistics to play a game similar to the one described for 100 trials. They were not given any incentive for winning (which can induce stupid behavior). They were merely instructed to make as much money as they could playing the game. Guess how many of them made money? Only two of them, or four percent, made money!

Typically, except for going broke, there are as many different ending equities as there are people in the audience. Yet they all start out with the same amount of money, and they all get the same trades (i.e., marbles). But in the end, there are so many different results. Why? poor position sizing and an undisciplined psychology. If people have trouble making money with a 60% marble system, what are their chances of making money in the markets? Very slim!

There are three critical factors to winning: (1) a positive expectancy system, (2) position sizing, and (3) individual psychology. All three factors tend to be neglected by the average trader
[and investor].

To continue the argument I laid out in another thread, ask yourself this question.

"How low does the cost of doing the trade (i.e., the commission) have to be before it has little substantive impact on expected profits?"

My answer is this. If you're screwing around with already marginal situations in which the difference between paying a 3% commission -- versus a commission of 1% (or less)-- will make a substantive difference to end-results, you need to find a new game or a better strategy. Hedge funds can turn a profit on the difference between a penny or two between what they pay and they receive. But the average investor lacks the skills and infrastructure to win that game, and they need to look for situations offering far larger profit margins where they can absorb the abusive transactional costs they typically have to endure, plus all of their inevitable mistakes of analysis. In other words, getting into a superior trade at whatever cost it will require is far more important than trying to get into a weak trade [or a weak investment] cheaply. Any idiot can do 'cheap'. But it takes real skill to find superior trades/investments, and that's what one's methodology (fundamental, technical, or otherwise) should focus on. First, get the big stuff right, like, why this investment is highly likely to work out exceedingly well, then worry about the small bookkeeping details of taxes and commissions.

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