Recently, I was going through the performance sheet of an advisory firm (Lets call it X). Now out of around 50 stocks recommended 46 were profitable. So what matters in markets is:
% Amount won * No of times you are right – % Amount Loss * No of times you are wrong
Now, lets focus on No of times you are right. Even the best investors or traders have a win rate of 60% (Believe me I am exaggerating). By win rate I mean they are right about 60% of the times.
So even basic knowledge of probability tells us, what the firm X is showing as true performance is most probably fake or we have found the best investor/trader in the world. Because they are right more than 90% of times. Any experienced trader will tell you that 90% success rate is baloney.
Now, if you are in the same situation what to do? Are they better than so many people. Its high likely chance they are misrepresent or some kind of fraud is going on. Gather evidence say them to get a forensic audit done. Pay the auditor yourself. If still they come out clean. Give them small amount of money and test. Once you are satisfied completely give them money.
Now obviously this is over a three year period track record, and some people may say the sample is too small. I am just saying chances are of a fraud be safe.
No investing or trading strategy has so high success rate. All strategies are about future. Future is all about probabilities. No one can be right about future so often. It is generally very tough to beat the wisdom of crowds. As once you are buying there is someone selling, and consistently being accurate about the future is very very tough.
From this instance I remember a story, There was a coin flipping contest going on.
7 Heads came in a row together (H,H,H,H,H,H,H)
A person was asked what are the chances? he said something less than 1%. While a trader was asked a similar question? He said the coin is rigged.
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