Many investors recognize the importance of capital management, whether it is called capital management, risk control, or position management, it is mainly some psychological biases that prevent people from making good capital management. The following famous experiment can illustrate some issues.

60% win rate game, 95% of people will lose all

Ralph Vince, who has written a series of books on capital management, once conducted an experiment: 100 doctors without a background in statistics or trading used a computer game to trade, each with an account of 10,000 yuan, and could make 100 trades in a game with a 60% win rate. If they win, they will receive a return equal to the funds they invested, and if they lose, they will lose that fund.

The final result was surprising: only 5 participants made a profit, and the remaining 95 doctors all suffered losses. Why? Because they used the "gambler's fallacy" and poor capital management skills.

Obviously, in such an ideal situation - a 60% win rate is considered high in many fields, without a good investment strategy and capital management, many people will lose all their capital. In reality, investment is a real battle of gold and silver, and gains and losses are the responsibility of the investors themselves. The following are several important capital management strategies that can help them make better decisions.

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Kelly strategy system

The Kelly formula is a formula that can be applied to investment and multiple random games, with the highest expected growth rate of capital and never completely losing all capital. It assumes that the game can be played infinitely, and there is no upper or lower limit for the investment amount.

[Kelly formula]

b = oddsp = the probability of winning

q = the probability of losing (generally equals 1-p, but sometimes it doesn't)

f = the proportion of current capital that should be invested next

f = (b * p - q) / b

For example: If a game has a 40% (p=0.40) chance of winning, with odds of 2:1 (b=2), f = (2 * 0.40 - 0.60) / 2 = 10%, so this investor should invest 10% of their total capital each time.

Of course, in the investment field, the Kelly formula needs to be improved, but it provides a quantitative method to determine the amount of investment, thereby ensuring that the investor's capital can grow faster without losing all their capital.

Martingale Strategy

Unlike the Kelly strategy system, the Martingale strategy system will double the bet after losing once, until it wins. Suppose, the initial bet is one yuan, and the investor gets a return of one yuan for every one yuan of risk taken, but the probability of winning is less than 50%. This logic sounds good, and in the end, the investor will win and get one yuan. However, there are factors that limit their use of this strategy.

Because a series of losses is very likely, and the probability is not low, especially when the probability is less than 50%. For example, they may experience 10 consecutive failures in 1000 attempts. In fact, it is also very possible to lose 15 or 16 times in a row.

When the investor loses 10 times in a row, the next time they must bet 2048 yuan to have a chance to win one yuan, and they may also lose 4095 yuan. At this time, their risk-reward ratio is 4095:1!In actual investment, everyone's capital is limited, which means it is very likely to blow up the position in continuous attempts.

Anti-Martingale Strategy

Assuming in a game with a 50% win rate, at any given point in time, the probability of an investor winning once is 50%, the probability of winning twice in a row is 25%, the probability of winning three times in a row is 12.5%, and the probability of winning four times in a row is 6.25%, and so on.

Therefore, in terms of probability, if the probability of winning four times in a row is 6.25%, it means that the probability of losing four times in a row is also only 6.25%. According to the "Anti-Martingale Strategy" operation method, as soon as you lose money, no matter how many times, you must start counting from the first deposit again.

Now, let's assume that the investor brought 63 yuan, and the first time they start with 1 yuan, they choose to use the "Anti-Martingale Strategy". Therefore, each win increases by a multiple of 2. That is, 1, 2, 4, 8, 16, 32, and so on, in an increasing manner to invest funds. Therefore, when they lose money for 4 consecutive times, the probability of occurrence is 6.25%, and they lose 4 yuan for losing four times in a row.

Similarly, if the probability of occurrence is 6.25%, and they win four times in a row, the investor will win 1+2+4+8=15, so at the "same probability point", they will "lose 4 yuan" or "win 15 yuan". Other probability points, such as the probability of winning three times or losing three times in a row is 12.5%, so at the "same probability point", the investor will "lose 3 yuan" or "win 7 yuan".

From this, it can be seen that the Anti-martingale strategy system, which increases risk in the case of profit, is very effective. This also applies to investment or trading, and fund management requires investors to increase positions when they are profitable.

What is fund management

The purpose of fund management is to tell investors how much they can invest under a certain scale of funds. It can help them determine the risk-reward rate or balance the risk of each investment in the investment portfolio.Some people hope to achieve capital management through "funding stop-loss". This type of stop-loss allows them to close all positions after losing a certain amount of capital, such as 1000 yuan. However, this stop-loss cannot tell them "how much", so it is not capital management. Controlling risk by determining the amount of loss to exit is different from controlling risk through a capital management model.

Conclusion

For investors, to survive in the market and maintain continuous profitability, capital management is an inevitable aspect. Of course, in the market, there are many theories, and everyone understands the principles, but the actual effect depends on individual execution, understanding, and the ability to improve the theory, rather than blindly believing or not believing.