Darwin, Finance and Stock Traders

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Photo – stockphototops.blogspot.com

One of the most common myths about stock trading around the world is that “insiders” or more commonly called “traders and brokers” have a key to the market. They enjoy inside edge in the market and possess the secret recipe to not only beat the market but also take advantage of the naïve investors who are sucked into their deception. I can assure you there is no such thing. If that was so, then I would have had a huge mansion and an array of cars to choose from. Better yet, I would have a car to actually go around my garage so that I could pick out a car to drive for that day. I don’t like driving that much but I think the point being made is obvious…

The traders who trade on the market are just more experienced. If an analogy was to be devised, we could say that trading on a given day is like trekking a new mountain. The trader has done it more than a new investor and has in-depth knowledge at hand with a skill set gained through trading that came with time and patience. Still, he can have setbacks or a bad day at the office and lose money. His resilience and the fact that he goes in the next day and the day after shows that he is the one who survives months later when many others have left the market. This is known as survivorship bias in the world of finance and holds true for any successful trader.

It follows the Darwinian theory of survival of the fittest and the one who can make profits in good times and minimise losses in bad times, will survive and show the market that he is successful. Supposing that a year ago, 10 traders entered the market and 1,000 investors put in their money as well. Now a month later, some would have made a profit while others made a loss and left. Just 12 months later, only a few of the traders would have survived, for example, in our case let’s say just 2 survived. That’s a success rate of only 20% in 12 months. Considering that only 20% of the traders who enter the market each year survive, we will see the number of traders fall rapidly from one year to another.

What if we take a period of 10 years? We will see that from thousands of traders, only a handful will survive and they will seem like fat cats to the new investors. Seeing that these people were there 10 years ago and are still existing would show that these people have a way to beat the market in a better manner than others. The wrong perception would be that they can make money by cheating. When in actuality, they have been better at their job than many others who packed up and left. So in truth, every trader who has traded in that time period should be analysed.

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