Comments on: Tycoon Tommy

By: PhilSteinmeyer.com » Blog Archive » Tycoon Tommy - Follow Up

PhilSteinmeyer.com » Blog Archive » Tycoon Tommy - Follow Up — Tue, 18 Apr 2006 15:04:52 +0000

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By: kim pallister

kim pallister — Tue, 18 Apr 2006 06:28:24 +0000

Averaging the interest assumes each is applied to the same principal.
There’s an order of operations thing to take into account, so it’s more like this (using the -20, +25 percent from the first example):

((Start amount * 0.8) * 1.25) * rate for year 3… and so on.

In the 2 year case, you end up with .8*1.25 = 1.

Taking Jay’s example, 1 year at -99%, and you’d have to have ~7 years of +99% to be back at around your starting amount.

By: Jay Barnson

Jay Barnson — Tue, 18 Apr 2006 05:48:45 +0000

Heh, all it takes is ONE Year at -99%…..

By: Stu

Stu — Tue, 18 Apr 2006 03:56:53 +0000

Yes, if anyone would like to demonstrate this for themselves, put $1000 in an Ameritrade account, think and act like Tommy while trading volatile penny stocks.

By: StGabe

StGabe — Mon, 17 Apr 2006 23:41:10 +0000

This puzzle is just an example of a fallacy that people make over and over again: confusing multiplication with addition. -50% interest last year + 50% interest this year = 0% interest, right? Err, no.

By: mathwiz

mathwiz — Mon, 17 Apr 2006 17:13:04 +0000

For a 50% down, you need a 100% up to get back to where you were. In other words, a 30% down and than a 30% up does not bring you back to the same spot!

With this math, I can easily see how he lost money.

By: Dave

Dave — Mon, 17 Apr 2006 15:21:06 +0000

There’s a name for this effect which escapes me at the moment. It’s X’s paradox.

Take a simple example of: -20% on yr1 and +25% on year 2. The average return is 2.5%, however, the actual return is 0%.

So, even though the avg returns may have been positive, substantial losses with lower % values could easily have wiped out his gains. Using the solver in excel, the following annual returns work: (.14, .41, .03, -.36, 1.14, 1.02, 5 of .5078, 9 of .251; fyi slight rounding error).