Tuesday, 14 February 2012

Does account size matter?

Does account size matter?

Yes it does! Very often, we would say we earn a return of capital of example 6% after this trade of xxx days.

This 6% seems simple but it is not exactly simple.

6% of 10k = 600
6% of 100k = 6000
6% of 1 mil = 60000
6% of 10 mil = 600000 = 600k
......and so on.

DO you get the story?

Two different investors may say that they have 6% gain, but their absolute gain is different.

Investor A may have 100k in capital and earn 6000 in that trade. However, investor B may have 10 mil in capital and earn 600k gain for 6%. 600k - 6000 = 594000 which is much more than the capital of investor A. In extreme case, even if investor A manage to pick multibaggers and earn 100% in trade, it is only 100k as compared to 600k.

In addition, don't forget that you can diversify or plan the allocation of money easier if you have huge capital. Assuming that you only plan to have no more 10% of your entire portfolio in any stock and each purchase is example 10k.

With huge capital (10 mil), you can keep buying at ALL supports. If this support breaks, you can buy at next support and the amount of money you allocated to this stock still never exceed the planned 10% of your portfolio. Once the market starts to recover, you can slowly sell in batches at different resistance and huat. However, if you have limited capital (100k), you can only buy at one support. If this support break, you cannot add more as it may exceed 10% of your portfolio and need to wait very long to repent and earn profit.

That's why you see some bloggers can keep buying and keep selling at many levels of supports and resistance while some cannot. Ops! who am I referring to? :)

Thus what is the moral of the story?

Account size does matter!!!

Work hard and increase your account size when young! Delay gratification? Don't get marry? eat bread drink water?

3 comments:

AK71 said...

Archoo....

OT83 said...

AK, why you Archoo? :)

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