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Profit sharing while compounding

  • #1
  • First Post: Mar 16, 2015 8:00am Mar 16, 2015 8:00am
Hey guys
So Im sure not many threads out there with this topic since everyone is still trying to make money but I was wondering about this. How does one calculate profit sharing with compounding? Heres the scenario. I have someone whose trading for me, lets say we decide on 80:20 split. I am interested in compounding, so lets say we start with $1000. We do profit sharing weekly so lets say he makes $50 the first week. So at 8020, that's $40 for me, $10 for him. Now lets say, I don't take my share and give him his $10. Now the balance is 1040 when it shouldva been 1000 but I didn't take my share. So now we split profits on 1040 and so on, so Im basically giving him more from my cut, make sense? Like im trying to figure out how can it stay even, well I guess the only way is we keep taking our profits and balance remains at $1000. If someone has any idea, would love to hear about it, thanks
  • #2
  • Mar 16, 2015 9:40am Mar 16, 2015 9:40am
The easiest way to calculate it is to keep a log of each month's cut . For example let's say he made $50 in the first week then $150 in the next week then $300 in the next week . The easiest way is to note down that your cut is $40+$120+$240 . If you decided to take some of your cut then you can write that down too .
  • #3
  • Mar 16, 2015 9:48am Mar 16, 2015 9:48am
Right, so basically hes making 20% off whatever the balance is. So lets say he does 5% weekly, that's $50 for the $1000 start. He takes 20%, so he takes $10 out of 50. Now the balance is 1040 since I didn't take my share. He does 5% of 1040 which is 52, he takes 20%, so 52X.05=10.4
So I guess, it is what it is, I was just thinking if this was lets say a 100K account, I would be taking my profit everytime but since I want it to grow, I wont touch my account, maybe take some % every month so I guess if im gonna compound, his profit taking would increase and I have to live with that.
  • #4
  • Mar 16, 2015 1:49pm Mar 16, 2015 1:49pm
For easier calculation, it will be better to know what's his investment startup?

If no, lets assume this:
(Your future balance after profit - 1040) * 20% = His Share
(Your future balance after profit - 1040) * 80% = Your Share

It's better to separate account or to set criteria of withdrawing profit randomly. Eg, I'd set the followings:
- Only withdrawal of profit after X months/weeks
- Only withdrawal of profit after hitting XX%
- Only do same % of withdrawal

Why make things difficult for yourself if you are making money for him.
The only winner is the one who survive the longest...
  • #5
  • Mar 17, 2015 5:50am Mar 17, 2015 5:50am
Its the same result.. he didnt get extra of it. it will always be 80:20. his share in value of $ is increasing because of the balance you have remains in your account. look at is this way. if your account grew from 1000 to 10000 and the profit weekly is 500 instead of 50, he will be getting 100 instead of 10. the ratio is still 80:20. you dont lose anything. neither does he get anything extra.
  • #6
  • Mar 17, 2015 6:01am Mar 17, 2015 6:01am
Quoting forexneewb
Hey guys So Im sure not many threads out there with this topic since everyone is still trying to make money but I was wondering about this. How does one calculate profit sharing with compounding? Heres the scenario. I have someone whose trading for me, lets say we decide on 80:20 split. I am interested in compounding, so lets say we start with $1000. We do profit sharing weekly so lets say he makes $50 the first week. So at 8020, that's $40 for me, $10 for him. Now lets say, I don't take my share and give him his $10. Now the balance is 1040 when...
Actually you may as well decide to let him keep is 20%, and you too keep 20% on the acct, and withdraw the other 60%.

See it this way, if every month (or week or whatever) you withdraw your profits and put them on another private account of you, then you will have 100% shares of the profits that will come from that account.
If you keep in the shared account instead, you will only get 80%.

Friendship is good, but business is business.
If he compound 10 you should compound 10 too, not more.

Hope it help


Edit:
My post make sense if you are the active trader in the account, but as your share seems to be 80% you are probably the passive investor, so the best thing to do is keep the profits on the account and compound.
  • #7
  • Mar 17, 2015 6:25am Mar 17, 2015 6:25am
Quoting kinspk
For easier calculation, it will be better to know what's his investment startup? If no, lets assume this: (Your future balance after profit - 1040) * 20% = His Share (Your future balance after profit - 1040) * 80% = Your Share It's better to separate account or to set criteria of withdrawing profit randomly. Eg, I'd set the followings: - Only withdrawal of profit after X months/weeks - Only withdrawal of profit after hitting XX% - Only do same % of withdrawal Why make things difficult for yourself if you are making money for him.
Actually I am the investor, im throwing big round numbers for ease. Yes weve decided on weekly, so its not at random times. I didn't entirely understand the point youre trying to make
  • #8
  • Mar 17, 2015 6:27am Mar 17, 2015 6:27am
Quoting Holypendant
Its the same result.. he didnt get extra of it. it will always be 80:20. his share in value of $ is increasing because of the balance you have remains in your account. look at is this way. if your account grew from 1000 to 10000 and the profit weekly is 500 instead of 50, he will be getting 100 instead of 10. the ratio is still 80:20. you dont lose anything. neither does he get anything extra.
It wasn't as much as the ratio compared to the amount. My point was, since Im not taking anything out and he gets his cut, the next time the cut is bigger since theres a bigger balance so I looked at it as if hes getting more than what he should but I guess theres no way around it if im looking to compound I guess
  • #9
  • Mar 17, 2015 6:29am Mar 17, 2015 6:29am
Quoting tunera
{quote} Actually you may as well decide to let him keep is 20%, and you too keep 20% on the acct, and withdraw the other 60%. See it this way, if every month (or week or whatever) you withdraw your profits and put them on another private account of you, then you will have 100% shares of the profits that will come from that account. If you keep in the shared account instead, you will only get 80%. Friendship is good, but business is business. If he compound 10 you should compound 10 too, not more. Hope it help Edit: My post make sense if you are...
Yea im the investor and no, the taking 20 and leaving 60 didn't make sense to me
  • #10
  • Mar 17, 2015 6:40am Mar 17, 2015 6:40am
Quoting forexneewb
{quote} It wasn't as much as the ratio compared to the amount. My point was, since Im not taking anything out and he gets his cut, the next time the cut is bigger since theres a bigger balance so I looked at it as if hes getting more than what he should but I guess theres no way around it if im looking to compound I guess
Er... are we missing something here? you mean he should get a fixed amount of $10 irregardless of the balance you had in the account?
  • #11
  • Mar 17, 2015 6:55am Mar 17, 2015 6:55am
Quoting forexneewb
{quote} Yea im the investor and no, the taking 20 and leaving 60 didn't make sense to me
Yes if you are the investor just pay him thank him for his work and shut up.
  • #12
  • Mar 17, 2015 9:38am Mar 17, 2015 9:38am
Quoting forexneewb
{quote} Actually I am the investor, im throwing big round numbers for ease. Yes weve decided on weekly, so its not at random times. I didn't entirely understand the point youre trying to make
1. First Week
Capital = $1000
Profit = $50
Performance Bonus = 20% * $50 = $10

2. 2nd Week
Capital = $1040 (This is all your money)
Eg Profit = $100
Performance Bonus = 20% * $100 = $20
*Because he had already took out his performance bonus/commission
The only winner is the one who survive the longest...
  • #13
  • Mar 17, 2015 12:17pm Mar 17, 2015 12:17pm
I believe that you are fighting the wrong fight. People have explained how 20% is 20% no matter what.

In profit sharing I would think that the Investor wants the longest measurement time profile possible while the trader wants the shortest measurement time profile possible. In this case you are measured Weekly and you do not list Hurdle Rates, Highwater rates, True-ups etc. You do not mention what happens if he makes $100 profit in Week 1 and therefore takes $20 for himself and $80 for you (total equity now $1080). In Week 2 he loses $108 (consistent win 10% in week 1 and lose 10 in week 2..just easy numbers to illustrate) and so your Net Equity is now 1080 - 108 = 972. So in 2 weeks you have lost $28 and you have paid the Trader $20 for that privilege.

Understand the metrics and all the language around it. Do not begrudge the Trader his fee but create a performance management strategy that keeps both parties happy.

Just for edification a Hurdle Rate is a minimum rate that must be achieved while a Highwater mark is recognition of a new equity beginning. True-ups are typically used when you have a short payment period and a longer measurement period. Think of it as a weekly draw against a monthly number. So in 4 weeks he makes total profit per week of $100, $200, -$100, -$150. In week 1 you paid him $20, in Week 2 you paid him $40 and you paid him $0 in Week 3 and 4. The True-Up now kicks in as you paid him a total of $60 for the month but he only made total profits of $50 for the month. Thus you true-up the 20%*$50 = $10. You should have paid him $10 but you paid him $60. Do you claw back $50 immediately (as he pays you back) or do you take it out of future earnings etc etc.

There are many ideas that need to be addressed and the %rate is minor.
  • #14
  • Last Post: Mar 17, 2015 12:42pm Mar 17, 2015 12:42pm
If you do not withdraw profits while he does, his share of participation drops.

The simplest way to manage this with joint account would be keeping 80/20 split on the primary investment contribution and 100% to you on the balance which is over that amount.
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