From the desk of risk:
The trader sums his gains. The investor compounds her returns.
When I was a kid, we used to have bike races through the neighborhood. One particular race on a summer evening featured a 1.5 mile route, a fit 12-year-old on a dirt bike, and a slightly pudgy 10-year-old on a ten-speed. Of course, the ten-speed was a much bigger bike so it was going to be an interesting race. Those not racing would follow along on their bikes or wait at various points along the route. A few bets were made (mostly trading cards) and the race was on.
The race began exactly as would be expected – the older boy on the smaller dirt bike jumped out to an enormous lead. At one point, the distance between the two riders was somewhere between two to three hundred yards. But . . . slightly past the halfway point, the younger boy on the ten-speed pulled ahead. In the end, it wasn’t even close.
Why did the younger boy win? Read more