Traders can go bust even when they know the outcome; Zerodha cofounder Nithin Kamath explains how
Zerodha founder Nithin Kamath, in a post shared on X (formerly Twitter), discussed the findings of an investment experiment conducted by Elm wealth, which revealed that nearly half of the participating finance students lost money despite correctly predicting market movements more than half the time kamath highlighted the experiment in a detailed thread, calling attention to the dangers of poor position sizing and risk management in trending students accurately predicted market direction 51.5% of the time, better than random chance, yet still failed to make gains.
Many students bet huge portions of their portfolio on a single trade. Some used 20x, even 60x leverage. When they were right, they made money. But when they were wrong, they blew up. All it took was a single misstep,” Kamath noted in his post.
He emphasized that this difference boiled down to understanding the art of position sizing.
Kamath pointed out a crucial takeaway: “Even if you could predict the future, it wouldn’t save you from poor risk management. Trading isn’t just about being right. It’s about surviving long enough to stay in the game.”
Quoting from the experiment, Kamath noted that most retail traders focus primarily on predicting market direction, but smart traders focus on how much to bet and how to manage risk even when they are correct.
He cited the wisdom of Ray Dalio: “He who lives by the crystal ball will eat shattered glass.”
The experiment, which referenced a theory by Nassim Nicholas Taleb, supported the view that even with early access to market-moving news, traders could still fail without disciplined risk control.
Kamath concluded his post, stating, “Because in the markets, being right means nothing if you go bust before you’re proven right.”
In the end, the financial industry’s pursuit of better predictive models should also focus on sensible investment sizing to fully realize the potential of their strategies.
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