April 28, 2021

If you figure out all the ways to lose money in the market, then you won’t lose money anymore.

When you study investing:

Warren Buffett’s first rule is : Don’t Lose Money.

Warren Buffett’s second rule is : Remember to follow rule 1.

In this video, I will explain how you can become a more profitable investor by studying how to lose money So if you are losing money and want to learn more about risk and reward, then this video is for you

90% correct transcript

13 years ago. I know nothing. I started with absolute zero and I tested my way through 300 different strategies. How is it possible setting a tighter stop loss taking losses just with a few percent of loss will lead to more losses overall. So by panicking, you can actually make any strategy on profitable. If you set your stop loss too tight. So welcome back to my channel. And in this video, we're going to talk about the unpopular opinion, how to lose money with any strategy is quite interesting that I'm going to make a video like this because who the hell wants to watch a video on how to lose money? When you can try to learn how to make money, right? When you think about Warren Buffett's, one of his rules is really not leaving money. Rule number two is rule number one, and there's is an ounce of truth in that quote, because if you learn how to lose money, then you'll also learn how not to lose money.

And that's what this video is about. And it's about a very important concepts that I'll reveal later in this video, once you master that, then you will have a much better control over your investing strategy. And instead of losing money, because if I kind of do this one thing, then I can actually lose money with any strategy, regardless of how successful the indicators are or how accurate it is or whatnot. So here's a quote from myself. If you figure out all the ways to lose money, then you won't lose money anymore. And it's a quote from Eric CDOT. The reason why I wanted to give you this quote is because that really summarizes my investing journey. When I was investing 13 years ago, I know nothing. I started with absolute zero and I tested my way through 300 different strategies. I placed over 10,000 trades.

So on and so forth. I tried different markets, different currencies. Basically, I tested out all the different combinations of indicators to figure out how to lose money. It was an extremely painful process, but nevertheless, I've got through it and I figured out how to lose money. So I can tell you how to lose money very easily. And if you follow those steps, you'll learn how to lose money as well. So if you do the opposite of that, that you will make money. Let's talk about a couple of situations. You can tell me what you think in terms of with situation, we'll lose the most money. So situation one, imagine you're a long-term investor and you set a stop loss of 10% and a gain of 20%. And what this means is that if the market goes down by 10%, you sell no matter what. And if the market goes up by 20%, you sell no matter what.

So here you can see that the risk and reward is defined. The second situation is, imagine you are a long-term investor again, and every time you see your position, having a few percent loss, which is less than 10%, you take a situation. Number three, imagine you're a long-term investor and you don't set a stop loss. Instead you hold for a year. So you don't care about what it does during the year. It might go 50% off or 50% down. You will hold for a year. What do you think is the probability of each of them? Which one do you think we'll lose the most money? And the answer is number two. So you might be wondering, huh? How is it possible setting a tighter stop loss, taking losses just with a few percent of loss will lead to more losses overall. And I've actually done this many times in the simulator, tested it in real life as well.

I don't have the data with me anymore because that was many years ago. This is because of one word panic. When you're investing and you have a strategy, and if you panic, you will try to take losses more rapidly. And when you observe that pattern, what you need is to tell yourself to stop. You need to make sure you don't panic. Because every time you see a loss, you take it. You will be taking a lot more losses. And if you just hold onto the stock for, let's say a period of time, let's say one year, 50% of the time the market goes up and 50% of the time the market goes down. So it was important to take care of your emotions when it comes to investing long-term. So by panicking, you can actually make any strategy on profitable. If you set your stop loss too tight, and let me illustrate to you with a couple of examples.

So the first one is your target profit is 10% profits and 10% loss. Now this sounds quite straightforward, and I'm not going to consider transaction costs here, which is going to be important as well. But your probability of winning loss, in example, one is 50%. So half half. So this is quite straightforward. Example to your profit is 20% and your loss is 10%. And if you are investing in a completely random market, then your probability of winning a 66% win and 33% loss. So that means in order for you to have a winning strategy, that actually makes money. You need to win more than 66% of the time. If you win 60% at a time, but making 20% profit is not good enough, because over the long run, you will still lose money. Example, number three, 90% profit and 10% loss. Now, if this seems like a great idea, because you're like, I'm going to win big. Every time I make money, I'm going to make 90%. And I'm only going to lose 10%. This might seems good on paper until you calculate the probability and you realize that 90% of the time it will hit your loss position and 10% of the time you'll win. So that means you might losing, losing,

Losing, losing, losing, losing, losing, losing,

Losing, and then you win. And sometimes when you're looking at probability, you might be losing 18 times in a row, and then you win two times. So just becomes a very difficult emotionally to hold onto all these losers. When you think that's only two of them will make you 90% of return. When you're looking at the win rates, you also need to consider your risk to reward ratio. Now, example for you, target 10% profits and 90% loss. When you want to take small profits on a continuous basis and an afterwards one to two significant investments wipes you out. So you might be winning 90% at a time, but 10% of the time you have losses that will actually wipe out all your profits. And here you will find out that it's quite hard on your emotional States as well. You are in a euphoria when you're making small gains and bam is all your profits for the last three, six, nine months.

So when you think about that, this sucks. And I have actually tried every single example. I've shown you here, whether it's through real life trading or coding and the strategy with different parameters, and it actually affects your emotional States greatly, depending on how you set your parameters. And for the fifth example, I'm going to do something more extreme. I'm going to target 9% profits with 1% loss. And here you can see dots. It is actually same as the previous example, number three. And in this case, again, 90% of the time I'll be losing money. So that's actually quite difficult. And if this is usually the result of a behavior that I'm taking rapid losses, because I'm panicking and not allowing my account to incur any unrealized losses. And when you do that, you actually take so many rapid losses that you will make your strategy unprofitable.

When you're testing your strategy, you're coding it or whatnot. You need to test all these parameters and figure out what works best for your strategy. Sometimes a strategy might work with a one-to-one risk to reward. Ratio will completely fail if you change the risk to reward ratio to two, to one to three, to one to four, to one and so on. So that's why you need to test all of it and make sure what works and which is why it is so time consuming. And example, number six is really the extreme where you aim for a hundred percent profit and you have a 1% loss, and sometimes you will see some crazy people do that. That means they will be taking losses every single day for 99 days. Hopefully the a hundred day it will be profitable for them. And it's really hard on you emotionally.

And when you think about the market volatility, it is very volatile. So it was extremely easy to lose 1%. So have you ever observed yourself having this kind of behavior and you panic or whatnot, then you need to stop. You need to step away from the trading station. You need to take a look at what you're doing. You need to look at your risk to reward and how come you're so uncomfortable having some losses in the short term and reviser strategy in your mindsets so that he can go forward again. So when it comes to investing, my goal is really to make 30% return a year. This is kind of important because 30% is a longterm goal. So I'm not trying to panic sell. I'm not trying to panic buy it is a long-term investment, and you can learn more about it as you go get the four hour free training on my website, which is five minute investing.com/free case study.

In that part that we'll talk about long-term versus short-term investing. I'll also talk about emotional States and how to look at the market highs and lows. So if you want to think about that, learn how I invest and go attend the free training. I mean, it's free. So when it comes to investing a solid writer, my goal is really to help another 20 professionals without a financial background to master investing and targets 30% a year. So in terms of successful case study within investing accelerator, Mike, where he made 44% from outer beauty, 37% from tech and also 60% from American express. So congratulations, Mike granny, she made 92% from ADP, and you can actually read her response here. And we also have Peter where he made 43% from CAE and 53.8% from Boeing. So all of these investments are actually less than 12 months. So congratulations. I know you are all doing a good job, so I'll see you in the next video.

About the author 

Eric Seto

Eric Seto is an investor with over 10 years of experience. He travelled around the world to help with auditing, accounting, purchase and sale of companies.

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