Spending the afternoon statistically trying to prove my father wrong!

With Python of course

Okay, this is a short one that most people won’t read. Disclaimer — this is not a tech project that I want to share with the world to exchange inspiration.

This is blog for me to look back upon 20 years later and reply either:
1. Wow this is where I officially became a geek.
2. What a dork!

It all started with my father and I having contrasting investment strategies. While Papa likes to see his investments grow, I like

In the financial investments world, these strategies are often bull vs bear. I’m no investment pro so please don’t get started with “No that’s not what it’s called”. It’s called that in my head. In a bull market, the bulls (investors) readily participate in investing and growing their portfolio. In a bear market, the bears (the cuter investors) pull out their investments from equities. Apparently, this stems from bulls being more aggressive and bears being tame. Clearly, traders do not watch the supreme visual masterpiece called “Dumb Ways to Die” enumerating the most dangerous killing mediums around us (which includes the bear and not the bull). Anywho, I’d rather be called a bear than a bull.

I wanted to prove that my style of investment, yields a higher return eventually and Papa was convinced in the power of compounding. And so I began the godforsaken task of trying to prove my father wrong, a journey only the bravest souls can take.

What my style of investment really is

In the random world of stock markets, I like to have a strict “stop-profit”. The portfolios grow and shrink throughout the year and instead of aiming to always grow, I try to set a target portfolio value. Once I reach that I pull out my investments and reinvest my original investment funds. That way I have secured the target profit and I repeat the same irrespective of the cycle duration. (I might make the target profit in a day, a month, or even 2 months).

Let’s get to the fun part

Although this isn’t one of the high CPU demanding pieces of code, I chose to go with the love of my life — Google Colab. Here’s my notebook:
https://colab.research.google.com/drive/18Ho5LOun4oTGBSGCvEKrn0HyUwAAEhRx?usp=sharing
Feel free to create a copy of this and destroy all my findings. I don’t mind!

The notebook assumes the simplest of market. At random, the daily market performance (the overall portfolio performance) would either grow by 5% or fall by 5%. We can always change these. Want to make yourself feel rich? Go ahead and change the values to +100% and +200%. Why stop there? Make it 1000% and 2000%!

The two methods for the bull and bear portfolio managements reflect the two investment strategies that we are comparing. The bull portfolio management is reasonably straightforward — investments compounded on the daily market performance. For the bear portfolio management, I consider a 30% target profit of the original investment amount. One could say that the bear portfolio management (in this case) is a combination of compound and simple interest.

I’m trying to observe the behavior over a period of 6 months and 1000 iterations to account for randomness. Basically, we would be studying 1000 outcomes to the identical original investment after 6 months. How old would you be if you were to observe that without the computer?

Who won?

There are 2 very fancy, complicated-looking graphs that I have plot from which I will draw conclusions.

1. I’m smart.
2. If you want to win big, you got better chances with the bull. (Better chances, not that it would work each time). The spikes in the first plot suggest this.
3. Both the bull and the bear strategies have a similar mean value, on average, you’d earn the same. But the chances of getting at least mean and above (till 2x original) is higher in the bear.
4. The bull has higher chances at a loss.
5. The bull also has a higher chance of extreme profit. Around 2/1000. Were you born with 6 toes, if not, you probably aren’t lucky enough. Don’t try. (PS — I do have 6 toes on my left foot)
6. I won. Obviously.

What did Papa say?

Papa wasn’t convinced. Obviously. My assumptions simplified the portfolio too much to compare the strategies with an unbiased perspective. He liked the fancy plots though.

Papa’s final thoughts (copied from WhatsApp forwards)

There are 3 sides to everything, my side, your side and the truth.