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 Financial Happenings Blog 
Sunday, August 06 2006

I had the somewhat saddening experience of being an exhibitor at the Investment Expo on the weekend.  The part that made me sad was the number of people selling trading programs promising returns of over 100% a year.  This just won't happen.  How do I know?

Let's assume for a minute that I have just been granted the gift of trading that lets me earn a 100% return a year on the stockmarket.  What am I going to do with it?  Probably the first thing I would do is borrow $300,000 and trade this myself.  The interest costs on $300,000 are $25,000.  That is a tidy profit for me of $275,000 a year.  I could live on half of this and then use the remaining $140,000 to add to the $300,000 starting balance and made $440,000 in the next year.  And so on. 

Or I might start a managed fund that charged a fee of 4% and 40% of the profits in excess of the average sharemarket return.  With an ability to return 100% a year I would very soon have $1 billion in funds under management.  The 4% fee would equate to $4 million a year.  The outperformance over the average sharemarket return would be, on average, 88% a year.  Being entitled to 40% of this equals a $350 million annual bonus.  That is $354 million of income - and growing over time!

What I would not do with this ability is sell it as a 'share trading' program.  Why?  Because as other people are buying when I am buying, and selling when I am selling, it will reduce the returns from my trades.  I will be selling away my secret.  I am far better off trading the secrets myself, or profiting by starting a managed fund.  No rational person will be selling share trading programs that really work!!  And they certainly would not have to use the high pressure sales pitches that underlie such sales.

Posted by: Scott Francis AT 06:06 pm   |  Permalink   |  Email
 
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