What are the chances?

We were all 12 and group games were our default. In this particular game, one of us was blindfolded in the middle of the room. The rest of us had ten seconds to pick a corner of the room to stand in, but we had to move quietly. The kid in the middle would then point to a corner. Anyone in that corner was out. That was one round. We would repeat until only one kid was left standing. That kid got to go in the middle and get blindfolded.

The boy starting in the middle on one occasion, Nat, had been a good friend of mine. I happened to survive the first three rounds. Everyone in the room, including myself, concluded that I knew the best corner to stand in, owing to my friendship with Nat. In the fourth round, everyone left standing piled into my corner.

Nat pointed straight at me.

What did I learn? Kids make noise.

What can you learn? The chances that an action which repeats itself will keep on happening are dependent on the chances that the action occurs once. If that is anything but 100%, the chances of the activity continuing gets smaller as it is repeated. Let me illustrate and prove that.

Hypothetically, we will assume the probability of a portfolio manager beating the market average in any given year is 0.5 or 50%. It is lower in reality. What are the chances that a portfolio manager beats the market two years in a row? Multiply the chances of doing it in a single year by itself for each year: 0.5 x 0.5 = 0.25 or 25%. How about three years in a row? 12.5%. Fifteen years? 0.098% or one chance out of 1,000 managers. Now you just have to find that one.

Here is an ugly truth: if it so happens that any manager will beat the market over the next ten years, you have no idea who they are.

Here is a beautiful truth: you do not need an advisor or a manager with a record of beating the market in order to succeed at investing. You need coaching.

Simon Joshua is a licensed investment advisor representative at Cornerstone Wealth Partners in Michigan. He has structured his practice around investor coaching and committed himself to leading communities in establishing a legacy of fulfillment.

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