InvestorQ : How to actually judge the success of your trading and investment calls?
Suhani Mirza made post

How to actually judge the success of your trading and investment calls?

3 years ago

The next time any trader, analyst or dealer talks about the success of calls given please take it with a pinch of salt. In isolation, the success percent is just a mathematical number. It conveys nothing about the ability of the analyst, the skill of the fund manager or the alacrity of a trader. At best, the success percent is a crude measure of success. Let us understand why! Under certain conditions all analysts and traders can look very smart. It is what they consistently achieve over a period of time that really matters.

In 2004 two very smart analysts had claimed that their success ratio was 80%. Effectively it meant that in 8 out of 10 cases their calls resulted in profits. However, the salivating success percent they were talking about was not translating into returns for investors. That means despite the best of return percentages, the clients were not really making money. During the same period, another low profile analyst with an extremely humble success percent was doing very well for his clients. The reasons were simple. He focused on large stocks, gave fewer calls, exited losers and held on to winners. It is not just being right that matters. What really matters is what you do when you are right and what you do when you are wrong. The moral, “It does not matter how right or wrong you are in the market. But it matters, what you do when you are right and, more importantly, what you do when you are wrong”. Strategy is more important than a research view. If you give too many trading and investment calls then by the law of averages you are likely to have a better percentage. The smarter and more difficult way to do it is to restrict to fewer calls and then manage the positions much better.