Well, yesterday was a good day. I earned 67% in a day! Not just paper gain, I actually initiate and end the transactions on the same day to realize the 67% profit. No kidding ! But can it be TRUE ?
While the 67% could be true. Most people would be able to catch the first pitfall.
- One day earning doesn't really mean much. As shown in this article, another day of 67% lost would not only not break even but actually making you some loses. The average return for the whole year is more important so that it is comparable with other rates like BLR and fix deposit interest rate etc. Persistency over the years would also become more important as time goes. Be reminded that Warren Buffet average annual return is 15.6% ( details in Greatest Investors of all time ).
- It is also not too hard to catch the 2nd pitfall. Actual amount matters. Earning 67% from $1,000 is very different than earning 67% from an investment of $100,000. I can easily turn $1 to $2 earning 100% return but I would be happy if I can get 10% return from my $1 million investment. This is the part that says size does matter and a big percentage number is only exciting when it works together with another big number.
- Another pitfall is one that some may overlook. Investment return should be calculated based on total capital, not the transaction amount itself. For example, I have allocated $1 million for a particular investment. In one particular transaction, I invested $100,000 and earned 67% return while the rest of the $900,000 sits somewhere doing nothing. My overall return is actually 6.7% only. Meaning I have earned $67,000 with $1 million. This is particularly important when judging fund managers performance.
So while it may be TRUE I earn 67%, but it may NOT be THE ENTIRE TRUTH on the perception of making such statements.
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