What Returns Should I Expect from Trading?

This question has been asked by many of my US based readers so far and last week, this same question came from a reader in Singapore. Here is my opinion.

From the outside, the public has this perception that trading is extremely exciting and extremely high reward if you get it right.

When I mean high reward, I’m talking about making ‘a killing’ and going out to get buy your first Ferrari, having your own boat, travelling first class around the world, buying your own mansion with private butlers etc. etc.

Well, I am here to tell you that this is far from reality.

In fact, investing and trading should not be very exciting if you want to become successful. You are better off getting your excitement elsewhere. If it is, you may be in it for the wrong reasons.

Trading is all about a disciplined process of doing almost the same thing every day, managing your risk, searching for opportunities and analysing any opportunities you do find to buy or to sell short.

It is because of this perception, that traders who start with little capital, expect to hit the big time very quickly so they can quit their day jobs, and when it doesn’t happen in a hurry, they are quickly discouraged and quit the game all together which is very unfortunate.

Investing and trading requires patience and above all, persistence and discipline.

The truth is, most traders do not make it. A number being thrown around is between 90-95% will lose most or all of their capital within 90 days or less.

I agree with this number because I just have to look at the people I met during my almost 20 year journey and the ones I knew when I started with, are still in their current jobs and are no longer trading simply because they lost their capital and thought, ‘trading is nothing but a gamble’.

This is also not true. They have gone the opposite extreme. One minute, they start their journey thinking it is easy and will make 50%+ p.a, and the next minute, they quit because they now see it like gambling so retreat to cash reaping less than 2%p.a or less.

Fortunately, there is middle ground.

What most don’t realise is that the best, and I mean the very best on the planet do between 15-30% p.a sustainable over decades.

When I say the very best, I’m talking about private investors and traders who ended up becoming the fund manager titans of today like Warren Buffett(21.6%p.a over 50 years), Prem Watsa (22.4% over 28 years) Daniel Loeb (19.6% over 19 years), David Tepper (29.2% over 17 years), and Jim Simmons (30%p.a over 30 years).

Their percentage gains do not seem very impressive, but compounded over decades, their net wealth has grown into the billions. What is most impressive is that, at no point in time that they ever had the risk of losing a significant portion of their wealth to get there. If they did, they probably would not be here today and me writing about them.

Of course, there are some private traders who claim to do 100%p.a plus returns in trading competitions, which is possible in the short run due to taking leverage, but is not sustainable over long periods.

By aiming for such high returns utilizing leverage with either margin lending, futures, warrants and options, the chance of losing most if not all your capital is almost certain.

My own record has always been between 15-25% p.a. Some years they were 35%p.a plus, but I happily admit they are not normal and it is these times which I start to examine if there were any excessive risks I may have taken without knowing.

People forget that almost 90% of professional fund managers who invest for a living don’t even beat their respective index, so if you as a private trader can either match or beat the index continuously, give yourself a pat on the back because you are already in exceptional company.

Shift your mindset to ‘risk adjusted’ returns and not just the returns themselves.

When I use the technical jargon ‘risk adjusted’, I simply mean how much risk you took to reach this return. Did you leverage far too much to get there and at any point in time, were you always safe from ever losing say more than say 5-10% of your total account overnight?

If you did, then your risk to get the returns may be too high.

Of course, everybody’s risk tolerance is different. Some people do not mind risk and happily risk up to 50% of their account to make the returns they seek. Personally, I believe this is far too high. I actually do not like seeing my account have more than a 5% drawdown at any point in time so I constantly seek to minimise risk in everything I do, even if it means lowering my short-term return expectations.

Look at the following table, and tell me, which trader would you prefer to be?

Trader 1

Trader 2 Trader 3
Starting Capital % Gain/Loss Account Balance % Gain/Loss Account Balance % Gain/Loss

Account Balance

$10,000 $10,000 $10,000
Year 1 17.00% $11,700 40% $14,000 50.00% $15,000
Year 2 18.00% $13,806 85% $25,900 -25.00% $11,250
Year 3 -5.00% $13,116 116% $55,944 70.00% $19,125
Year 4 22.00% $16,001 -60% $22,378 -30.00% $13,388
Year 5 21.00% $19,361 -40% $13,427 30.00% $17,404
Year 6 19.00% $23,040 35% $18,126 -20.00% $13,923
Year 7 -9.00% $20,966 -30% $12,688 -25.00% $10,442
Year 8 28.00% $26,837 42% $18,017 60.00% $16,708
Year 9 19.00% $31,936 38% $24,864 -56.00% $7,351
Year 10 -6.00% $30,020 -50% $12,432 -20.00% $5,881


Personally, I would rather be Trader 1 any day, not just because they have a much higher compounded return at the end of 10 years, but also a much more consistent performance and likely much better sleep too. Trader 2 and 3 is what most traders become when they first begin their trading journey. High risk for high returns, but as you can see, they will likely never get there.

So in summary, aim to firstly beat the indexes continuously. Sometimes this may not happen (even Warren Buffett has lagged the indexes many times during his career), so don’t be too harsh on yourself when this happens. Once you beat the indexes, aim for consistency rather than exceptional returns one year and lose your shirt the next.

Allow compound interest to do its magic over time because it does.

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