Good players understand the ODDS

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Understanding the odds is key for making purdent bets in any process (investments, games) that deal with uncertanity.

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Based on the above data the people who understand odds will quickly realize 2 things

  • All games are favorable for the player (a player who is ready to play many games has a good chance of coming out ahead).
  • Game Y has the best chance of winning followed by H, Q, M, and D, in that order.

A person who understands the odds will be keen to play game Y in preference to others.

Investments in the stock market (espically if one is investing in the Index) can be easily compared with the odds that are used for gaming.

The data used for this article is from NSE and has stock market data from July-1990 to date – 26 years, i.e., 6,366 trading days.

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Based on this data – a day trader  does not have great chance of making money in the market. The chances become even worse if one condsiders the frictional costs of brokerage and taxes.

A smart investor will realize that the market has a upward bias, i.e., on an average it generates 0.07% retrun on a daily basis. A good strategy will be for one to buy and hold – this has a chance of generating about 16% per year.

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A person who holds for about a month has about 56% chance of winning, with an average monthly return of 1.43%. Even in this case, if the frictional costs of trading and taxes will cut into the profits. Where as a person who is ready to hold can generate about 1.43% a month, which translates to about 17% a year.

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A person who holds for a quarter has about 59% chance of winning, with an average quarterly return of 4.6%. A person who is ready to hold can generate about 4.64% a quarter, which translates to about 18.5% a year.

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A person who holds for 6 months has about 61.5% chance of winning, with an average half yearly return of 8.85%. A person who is ready to hold can generate about 8.85% a quarter, which translates to about 17.7% a year.

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A person who holds for a year has  69.2% chance of winning, with an average  yearly return of 17.8%.

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The question presented at the start was about the odds for daily, monthly, quarterly, half yearly, and yearly investing.

Based on this data it is clear that a person who is investing regularly and holding for a long period maximizes the chance for generating decent returns.

If you would like to read more about benefits of buy and hold stratgy pl read our article – Investing is not collecting – Patience is the key

Happy Investing….


 IndusWealth:Making your money work for you

About Praveen Reddy

http://in.linkedin.com/in/praveenreddyinduswealth

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