Traders can go bust even when they know the outcome; Zerodha cofounder Nithin Kamath explains how

Time of India

3 days ago

Zerodha
founder
Nithin Kamath
, in a post shared on X (formerly Twitter), discussed the findings of an
investment experiment
conducted by
ElmWealth
, 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 trading.
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Interesting experiment by
@ElmWealth
: 118 finance students were given tomorrow's WSJ front page 24 hours before the news broke. You'd expect easy profits. Instead, half lost money and 16% went completely bust.
It wasn't because their predictions were wrong. They called market…
pic.twitter.com/rdm1zNY8AE
— Nithin Kamath (@Nithin0dha)
July 21, 2025
According to Kamath's post, 118 finance students were given access to the Wall Street Journal's front page 24 hours in advance over a simulated 15-day period. While the information advantage should have logically led to profits, it was noted that half of these students lost money, and 16% went completely bust.
The students accurately predicted market direction 51.5% of the time, better than random chance, yet still failed to make gains.
Kamath explained that the core problem was not the quality of their predictions but their position sizing.
'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.
In contrast, five experienced traders who ran the same simulation achieved dramatically different outcomes. Kamath said, 'Very different outcome: +130% average returns. Why? They knew how much to risk. They bet small when uncertain, and big only when the odds were clearly in their favor.'
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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