The Myth Of Easy Money: Why Trading/Investing is Challenging

As professionals with a long experience in trading/investing, we often get asked to teach people how to trade and invest. “Don’t you have a quick course I can take, and then I can go and trade myself?” – they ask. Invariably, we discourage people from taking quick courses – trading/investing is a serious undertaking that takes a long time to master. The reason is NOT that we need to teach you new and complicated methods, which we do have to, but rather because there are many misconceptions about trading and investing that people believe.

Let us give you one of our favorite examples – you have a series of three nonrandom numbers, which means there is SOME logic behind them. Those numbers are 5, 10, and 20. What would you guess the fourth number from this series to be (Question #1), and what do you think is the possibility of being correct in your guess (Question #2)?

We have asked this question individually and collectively to over a thousand people, and we can tell you what the majority of people say. Most people answer Question #1 with 40, and the answer to Question #2 is 50%.

Do you agree with that? Is 40 the fourth number from that series, and the probability of being correct is 50%?

Well, the answer, in OUR opinion, is 40, with 0% (or nearly 0%) of being correct. Why? Because there are many other possibilities – imagine a series with 5, 10, 20, 105, 110, 120, etc. Or 5,10, 20, 1005, 1010, 1020. There are multiple series that fit into this pattern. The original series came from bank notes – in most countries, the paper currency denominations are 5, 10, 20, 50, 100, etc.

The important thing here is that this is a PATTERN. Trading/investing makes sense, but it ALWAYS feels uncomfortable. Good trading and investing feel like an excellent criminal novel – your first suspects and instincts are rarely correct. What makes sense and feels comfortable in trading and investing will either be unprofitable or make very little money.

Why do most people get this question wrong? Well, most people fail to recognize this pattern because they lack a probabilistic mindset and may have little exposure to statistics. If you have three observations, statistics say that the degree of freedom of the sample is 2 (degree of freedom = number of observations -1). With a degree of freedom of 2, this probability distribution is so broad almost NOTHING can be concluded. To get a realistic idea of the distribution, you need at least 5 or 6 observations, ideally closer to 20.

We observe this error repeated over and over in our life – to get a realistic idea of any person; you need to watch him probably about 20 times (every day for a month). But people prefer otherwise – they say, “first impression is always right” or “I can see it in their eyes that they are bright”. The above statements are NOT accurate – people’s eyes are NOT a proxy for one’s intelligence, and your first impression is NOT always correct. Your first idea about what to do in the markets is invariably what most people will think; hence, it is unlikely to be profitable.

Good trading/investing makes sense; it always feels uncomfortable and requires effort. It is almost NEVER your first idea or answers to a situation that will work; it is invariably the second, the third, or even the 10th idea that ends up working or turning profitable. And that is a PATTERN – your first idea and instincts are almost ALWAYS wrong. It would be best if you kept searching for different answers repeatedly, and that takes effort. And most people are reluctant to do that because their first answer makes sense and feels comfortable.

Good trading makes sense, but it does NOT feel comfortable.

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