"I think I know what Madamswer is trying to say in his previous posts. Madamswer, please correct me if my understanding is incorrect."
@travelightor,
Thank you.
Excellently articulated.
That is exactly my line of thought.
(Although, while the analogy is a very good one, I would have preferred it if you had used maybe an aspiring pro golfer or tennis player in your hypotethical study. Because I'm not sure how I'd respond if my wife or children asked me why - as a middle aged man - I was responding so enthusiastically to a post involving a 15-year old girl!)
But I'd like to add one statistical rider to your example (your post alluded to it, but I think putting it in hard numerical terms will illustrate the point even more clearly).
Let's say you have some loose cash slopping around ($10m) and you are in a position to back 10 aspiring supermodels at the 15-year age mark (equivalent to buying MSB at $1.50 today, along with 9 other biotech stocks that show equal promise).
Statistically, let's say that 1 of those 10 "make it", and establish a modelling career by age 18. (I don''t know the exact success rate of biotech or medical concept companies, but my observations are that far fewer than 1 in 10 biotechs make it onto the big stage, either on their own or by being acquired for full value.)
And let's say that by the time her career is clearly established by age 18 and that she is no longer dependent on creepy middle aged men as financial backers (this point in time is equivalent to MSB reaching the point of self-sustainable commercialisation, which presumably would correspond to the share price reaching around $7.50 or $8.00, i.e a 5-bagger; but hey, let's be generous and say the stock goes to a record high of $10.00, i.e a 6.5 fold increase from its current price.. which would make it aproaching $4bn in market capitalisation).
Of course the other 9 biotech concepts would - statistically - have failed, and you would have done your dough on them. But, again, to be generous, let's assume you are nimble enough to recognise early enough that the writing is on the wall for these 9 failed ventures and you manage to sell out before the very end, thereby salvaging some residual capital, say 20% of your initial outlay, as a quite generous average.
The maths of your total investment return position looks like this:
You started out with $10m.
You end up with one holding worth $6.5m, and 9 others worth $0.2m, for a closing portfoilo balance of around $8.3m, which equates to a Net Investment Return of
minus 18%.
And that negative outcome is based on what I think are reasonably generous assumptions that are actually in favour of such an investment strategy.
And that's just the pro forma of the pure financial aspect of things.
It takes no account of the affects on mental wealth; the stress and anxiety of the volatility inherent in these sorts of investments and their inability to match expectations with actual outcomes, compared to companies with already-established financial track records.
People may on rare occasions talk about Risk-Adjusted Investment Returns, but they never talk about
Stress-Adjusted Investment Returns.
And just as I have often observed that the mantra (which I suspect is another charming construct of the stockbroking industry) of High-Risk, High-Returns is a bit of a myth (in reality I far more often come High-Risk investments ending up generating Low Returns, while the best performing companies over time are the ones conventionally considered to be Low in Risk) - so too do I observe that investments that induce high levels of investor stress and anxiety, invariably are ones that are associated with poor returns. And vice versa.
And if I thought your analogy was highly instructive, then it is matched by this canny observation of yours:
"For the record, even if these bots/algos/shorters do operate in our market, I don't get bothered by them at all, because in the long run, the performance of the underlying business will determine the share price. All of these are simply noise to my ears."
I assume you ignore this sort of noise when it erupts violently on the ARB and REH threads?
(20min delay)