Happiness depends on win rate, success depends on odds ratio.

Ask AI · How does the Turtle Trading Method utilize odds thinking to overcome human weaknesses?

The Odds Thinking of Successful Investors

#01

Step Two: Make the Money

Find a stock that can rise, which provides a basic win rate. But like when asking for directions, someone pointing you in the right direction doesn’t guarantee you’ll reach there. The latter is usually called “trading ability.”

Years ago, I asked a trading expert how to improve trading skills. He shared a training method:

“Randomly select three stocks from your watchlist—be sure to choose randomly—and only trade these three stocks. Aim to beat the index within a month.”

This is a focused trading practice to maximize the reduction of stock selection and market fluctuation factors. To make the training more “specialized,” there are also “Turtle Trading Method Training” and “T+0 Training,” which involve repeatedly practicing only one method to find the feel of trading.

All these trading method trainings must fix operational details and include them in assessments. Violations mean you can’t profit even if you make money. Leave some room for active judgment and operation to repeatedly train, forming a “trading instinct” and muscle memory for the method.

Many value investors look down on trading ability because value investing is about buying and holding, not trading. But even value investing has two steps:

Step 1: Find stocks that can make money

Step 2: Make the money

“Step 2” is not a joke. Try it: tell two people about a stock you think is good. After a year, if it rises, check their investment results. The differences are often huge—one may profit, the other lose.

So, stepping out of the surface question “Is trading ability important?” reveals the core: Does your investment system have enough consistency to invest in different types of assets across various market environments and still replicate your strategy long-term?

It’s the eight words I mentioned in my previous article “You Only Need a 55% Win Rate to Possibly Be Warren Buffett”: Accept the win rate, grasp the odds.

#02

Turtle Trading and Odds Thinking

Any investment method, after selecting assets with specific characteristics, has a roughly fixed win rate. Once stop-loss points are set in advance, increasing returns depends on two factors:

Subjective effort in choosing entry points (making things happen),

Actual gains depend on when sell signals appear (things happen by chance).

Take the Turtle method as an example: it defines profit or loss from entry to stop-loss as 1R. It buys assets with breakout patterns and holds until the trend ends. The results can be -1R, 0~-1R, 0~1R, 1R, 2R, 3R, 4R…

Since many trades require stop-losses, the Turtle method’s win rate is relatively low—around 40% is good. Most profits come from a few trades exceeding 4R, and each such trade may correspond to a dozen small wins and losses, with more losses than gains.

This method seems simple but challenges human nature greatly. Imagine coaching a child doing homework: you repeat instructions endlessly, but the child keeps making mistakes. Isn’t there a moment when you feel emotionally overwhelmed?

The Turtle method is similar. After ten consecutive stop-outs, while the market and other investors are bullish, emotional traders might curse and give up, while rational traders seek to improve the method.

Psychology has a “recency effect”: recent events tend to influence your current decisions more strongly. Consecutive failures caused by the same method, if they happen yesterday, impact you more than if they occurred months ago.

In investing, the “recency effect” greatly influences decisions. For example, whether to cut losses: after several failures, many give up on stop-losses. Then, when facing a big loss, they recall the benefits of stop-losses and try again. The same applies to chasing highs, bottom-fishing, position sizing, rotation, or sticking to a plan—investors repeatedly succumb to the “recency effect,” unable to develop a stable method.

Because of this, most people who try the Turtle method give up. A few attempt to improve it, summarizing some “rules” from “recency”: when not to stop-loss, when not to participate.

Trying to reduce trading frequency to improve win rate often backfires. The Turtle method’s monthly profit may come from a single successful trade, so it emphasizes not predicting the market and not missing signals. Missing big moves causes more frustration than losing money.

If you try to optimize stop-losses, the same problem occurs: before experiencing more big gains, repeated failures to hit predefined stop-loss points defeat you. Luck doesn’t distribute evenly.

Most people cannot truly accept the low win rate of the Turtle method, because judging by win rate aligns more with intuition. This prevents genuine odds thinking.

Turtle training involves fixed stop-losses, with sell signals mainly relying on luck. The only real test of trading skill is the precise entry point: buy early for higher odds but lower win rate; buy late for higher win rate but lower odds.

Trading ability is a kind of genetic talent. Our ancestors in the primal jungle needed effective hunting daily or starved, but hunting had risks:

• Going out blindly, exhausting energy, dying,
• Going out persistently, getting injured, dying,
• Being too conservative due to hunger, losing hunting ability, dying.

Hunting timing is about odds, not win rate.

Survivors had “odds thinking,” but few inherited it. Most people are either too smart—constantly trying to improve methods, dying—or too mediocre, with average returns, dying.

T+0 trading is similar: it emphasizes quantity judgment, with shorter operation times and higher speed requirements. Before the rise of quantitative strategies, it was a successful method. Only a few gifted traders, with precise buy point judgment and quick reflexes, could consistently earn excess returns. But how many are willing to do T+0?

Stop-loss is also about odds. Many articles oversimplify: “preserve strength,” “giving up is wisdom.” But the real problem with no stop-loss is that you can’t judge the odds.

So, if you have other ways to judge odds and can ensure you won’t lose everything in one shot, you might not need stop-losses, like basic value investing.

Value investing’s odds are judged through other methods.

#03

Long-term Investment and High Odds Constraints

If trend investing can be divided into:

Step 1: Plan your trades

Step 2: Execute your plan

Then, value investing also has two steps:

Step 1: Find excellent companies with long-term growth potential

Step 2: Buy at reasonable prices

Buffett’s approach to Step 1:

Choose to invest in companies that even fools can run, because someday these companies will fall into the hands of fools.

When a thriving management team faces a declining sunset industry, the latter often prevails.

Companies with “franchise rights” are those that can easily raise prices and, with some additional investment, increase sales and market share.

…

Buffett’s approach to Step 2:

We don’t want to buy the worst furniture at the cheapest price; we want to buy the best furniture at a reasonable price.

When Charles and I buy a stock, we don’t consider timing or price points.

We multiply the probability of loss by the potential loss, and the probability of gain by the potential gain, then subtract the former from the latter—that’s our ongoing approach.

…

Step 1 assesses the win rate of an investment, depending on industry, competition, management, but remember: these factors are often uncontrollable by investors (and sometimes even by managers):

• Technology suddenly becomes obsolete;
• A dominant company in a niche faces a price war from a giant;
• Assets abroad are confiscated by a coup;
• An industry worth trillions is wiped out by a single paper;
• A thriving company’s chairman is kidnapped at sea…

In 1982, two American management scholars wrote “In Search of Excellence,” selecting 43 top US companies, summarizing eight standards for excellence. But within a few years, one-third no longer met those standards.

To avoid this embarrassment, Jim Collins later wrote “Built to Last,” lowering standards: survival matters more than excellence. He compared 18 industries with top and mediocre companies. Despite some matchups, several companies underperformed the “comparison group.”

SoftBank sold Nvidia just before the AI boom, and Huang Renxun regretted not privatizing when he had the chance. Who knows Nvidia better?

In highly competitive industries, the win rate naturally regresses toward 50%. The idea of “long-term excellence” or “pursuit of greatness” is often just marketing. Relying on win rate for high returns is a luxury—though “good management” helps, as I’ll mention later.

Don’t expect research alone to significantly improve win rate—say, from below 50% to 55%. Even blue-chip stocks can’t. So, listed company research should focus on key issues; details are often unnecessary.

Choosing dark horses won’t increase your win rate either. Dark horses inherently have lower win rates, and industry insiders’ judgments only slightly improve that. Dark horse investing relies on odds—once the dark horse turns into a winner, the profit potential is high.

It’s not that value investing can’t profit from win-rate strategies. Strategies like portfolio construction with blue chips, grid trading, volatility trading, or economic cycle investing are typical win-rate approaches and can yield good returns. But when engaging in such win-rate strategies, you must understand: win-rate investing is a “small wins, big losses” system. When win rate unknowingly reverses, the penalty of odds doubles. If you don’t see the danger, losses can be huge.

Two ways to increase odds in value investing are: buy when cheaper, and hold longer. Details are in my previous article “You Only Need a 55% Win Rate to Possibly Be Warren Buffett.”

This system also challenges human nature: you need immense patience to wait for better, cheaper opportunities. The risk is missing this chance. When holding, you need great patience during long periods of stagnant prices. The risk: missing other opportunities.

It’s not just human nature; pursuing odds also constrains trade frequency. Lowering trade frequency means you need higher returns per trade to maintain your target yield, assuming win rate stays the same.

Buffett’s early and late methods differ: later, he lowered odds constraints—not because he improved his method, but because his capital grew larger, reducing available opportunities (assets of certain size). To maintain trade frequency (win rate unchanged), he lowered odds requirements. During holding, lowering odds is akin to increasing valuation tolerance, allowing him to hold relatively overvalued stocks like Apple.

This differs from trend-following methods like Turtle Trading, which set constraints on win rate and odds through stop-loss placement, ensuring trade frequency. They aim to seize every opportunity.

#04

Happiness Depends on Win Rate, Success on Odds

I’ve said many times: you can publish my trading rules in the newspaper, but no one will follow them. The key is consistency and discipline. Almost everyone can list rules, and they’re not much worse than ours. But they can’t inspire confidence in others. Only when you believe in your rules can you stick to them, even in adversity.

— Richard Dennis (Founder of Turtle Trading)

First, answer a previous question: what’s the role of excellent management?

In the short term, compared to average managers, top management can handle more competition and seize normal market opportunities. But long-term, management’s role isn’t as big as many think. Humans have weaknesses, and organizations do too.

So, for long-term investors, the greatest role of good management is to provide confidence. Like any investment, value investing experiences volatility. Most lose confidence during low-probability, high-odds downturns. At such times, increasing investment is crucial—top management helps us do the right thing at the right time.

The most dangerous time in investing is when you start doubting your judgment, making you hesitant to buy opportunities or to cut losses when risks appear.

Thus, mature investors trust their system. A trustworthy investment system should minimize subjective judgment. It can rely on either a lot of mystical beliefs or mechanical execution.

A trustworthy system includes two parts:

1. Trustworthy underlying principles

If you are confident in your system’s ability to make money long-term based on principles, you’ll be more likely to stick to signals even during short-term losses.

Trend trading like Turtle relies on the psychological instinct of support and resistance levels, causing price stagnation.

In my article “Why Do Retail Investors Always ‘Make Small Money, Lose Big Money’?” I analyze data showing retail traders’ obsession with high buy and low sell points, their instinctive belief in support and resistance. This makes support and resistance levels initially very effective, creating a “self-reinforcing” and “self-fulfilling” effect.

But when changes come from reality—like supply-demand imbalances, company performance shifts—prices will eventually break through support or resistance. Retail obsession with range trading delays the inevitable trend, giving trend-following a future upward space, which is the source of odds.

This is the effective principle behind Turtle, but also the reason for its low win rate: you can’t tell if a breakout is a true trend or just a larger oscillation.

T+0 is similar: volume is a signal attracting more traders. Due to the time lag between attention, judgment, order placement, and execution, a trend acceleration of seconds to minutes occurs, allowing quick traders to profit from T+0 price differences.

Most trading methods exploit psychological effects, earning money at the expense of other investors—like setting traps to catch prey.

Value investing is more accepted because its underlying principles are well understood: excellent companies periodically outperform the market.

Every specific investment method is an application of these two fundamental principles. For example, leading stock strategies rely on the trend phenomenon of strong stocks strengthening themselves, forming a systematic approach.

2. Strategy consistency

Win rate, odds, and trade frequency form an interconnected “impossible triangle.” Any investment system should fix some judgment criteria and operational details, only leaving core subjective judgments to a few key points. Subjective judgment influences profitability, not the method’s fundamental profitability.

This is strategy consistency—ensuring you can stick to your method across different markets. Most successful investors’ systems are quite “mechanical,” reducing subjective thinking, avoiding over-aggressive or overly conservative actions, and not missing key opportunities due to constant calculation.

Trend-following consistency manifests in trend judgment, buy/sell signals, position management, stop-loss, and mental state; value investing consistency involves company quality assessment, valuation, trading signals, position management, and holding period tracking.

Opportunities follow the “80/20 rule”: huge success often comes from one or two high-odds opportunities. Ordinary people, unprepared, can’t handle sudden “wealth beyond imagination”—but a good system can.

Happiness depends on win rate; success depends on odds. That’s true in both life and investing.