Our media is filled with the stories of people who made it – but this is massively disproportional – this is the “survivorship” bias in action.
For a discussion of this principle see the book ‘Fooled by Randomness’ by Nassim Nicholas Taleb – turn to page 135. I consider that reading and understanding of this book is vital for anyone looking to go into trading. For a super-duper and totally outrageously example of survivorship bias see the recent story of a 16-year old US kid who turned $10k into $300k trading penny stocks.
So here is my question to you: If this kid set up a hedge fund after turning $10k into $300k, should you put money into the kid’s hedge fund? Why or why not? If you cannot answer these two questions correctly – then you are not (yet) cut out for the financial markets.
P.S.: As one of my colleagues pointed out, it is of course great that this college student had a go at trading – and he certainly would have learned a lot about trading and about life in general. The point I am referring to here merely relates to the idea that this kid is a genius trader.
Added 16th Dec 2014:
And here’s another great story similar to the one above – although this kid must be doing all right because he has been trading for a much longer time frame – though the question of risk management must still be asked…..:
17th Dec: Hmmm, point illustrated perfectly? The $72 million story turns out to be fake.