Successful investing and trading essentially boils down to achieving two things: a positive expected value of your bets and adequate risk management. The first variable ensures that the odds are stacked in your favor (think of you being the casino), so that after many bets you end up with more money and not less. The second variable makes sure that you don’t blow up during this process.
(1) what do you need to make money?
(2) bring russian roulette example: what determinant can still make you blow up? what is the problem with only looking at the positive expected value? (→ the missing piece is that you have to also regard the max drawdown or the worst case scenario) (position sizing)
(3) → use the 1000 simulations idea and break that down for the 2 cases: first idea is to have a positive expected value of the 1000 simulations (i.e. in most cases you should make money, or at least if you calculate the profit/loss from all 1000 simulations, the number should be positive), number (2) is risk management: 0 out of the 1000 simulations should make you blow up! (this can be done by smaller position sizing/stop losses or advanced hedging techniques)
→ Positive Expected Value (”edge”) → creating a generator
→ and Risk Management (”playing out the edge”) → making sure randomness doesn’t kill you
e.g. buying stocks → historically more green than red → historical expected value as stock market rises in long run