A reality of markets is that big returns get the most attention. If someone makes triple digits for a handful of years (or even a year), they often get a chapter in a book and we all read in awe wondering how we might achieve the same.
The unfortunate thing we mostly don’t see (perhaps because we collectively don’t want to see it) is that these massive returns are typically unsustainable.
How do you know? Because if you make 100%+ a year for enough years you’d own the entire world many times over. That no one owns the entire world is all the proof you need to conclude no one can make massive returns indefinitely - at least not on big sums of money.
The question becomes, why can’t anyone keep these returns up?
The warm and fuzzy version is that the returns can persist, but the methods used to achieve these returns don’t scale. In short, you find a golden goose or two but they don’t work on big amounts of capital so you churn out 100%+ a year on a base of ~$1mm and live quietly happily ever after.
The not so warm and fuzzy version points to the following:
Big returns require big risk and, eventually, you lose a lot if you swing for the fences all the time.
Big returns are a function of a combination of the right approach to the markets at the right time combined with the right attitude, the right risk tolerance (think riverboat gambler stomach lining), the right amount of knowledge, a lack of competition, and so on.
In short, the not so warm and fuzzy version allows for some level of skill, but is mostly a function of things that cannot be controlled and thus cannot necessarily be repeated. A collection of variables, many of which you don’t control, have to combine to produce jaw dropping outcomes.
A “where are they now” book that explored how various big return generators faired post legendary results would be interesting. However, it would probably not be a best seller as it would likely conclude the not so warm and fuzzy narrative above.
Despite this, we often stand in awe of amazing returns and think the people who achieved these returns are just being modest when they shrug when asked how they did it. But the truth is they’re probably shrugging because they know a lot of the “secret” came down to uncontrollable factors (aka luck).
Some say we make our own luck and, to a degree, this is true. If you adopt the right approach with the right amount of risk and live long enough, you will likely hit a window of opportunity that allows you to make a fortune. But, if luck doesn’t show up quickly, you’ll likely go broke several times which will require you to keep finding new money to trade. Very few have the temperament to swing for the fences, wipe out, find more money and repeat until you achieve glory.
What’s my point? When you see huge returns and find yourself in awe, consider this post.
This is why I focus on generating a steady income from buying dividend stocks and selling covered calls and cash secured puts on them. I prefer to work to generate a 10% to 15% annualized return on risk rather than take a lot of risks to make, maybe 33% on an investment after being in it for a few years.