why do people think trading will make you rich?
Because there are some very rich traders, including the fourth-richest person in the world.
Who is that?
Trading Is Hazardous to Your Wealth [pdf] (2000)
21–30 of 116 posts
Re: Trading Is Hazardous to Your Wealth [pdf] (2000)
#22I read an article a few years ago that compared the trading performance of various strategies. The number one performer was the "dead people" strategy, which happens when a person dies and his portfolio cannot be traded while the inheritance issues are sorted out. Next best is the broad index fund, and dead last was the average investor. Edit: Found the article! https://www.businessinsider.com/forgetful-investors-per…
And tunneling far below that was /r/wallstreetbets
Re: Trading Is Hazardous to Your Wealth [pdf] (2000)
#23Re: Trading Is Hazardous to Your Wealth [pdf] (2000)
#24> Trading costs are high. The average round-trip trade in excess of $1,000 costs three percent in commissions and one percent in bid-ask spread. A lot has changed in 20 years. The conclusion may still be the same, but spreads are much tighter (thanks in part to HFT) and trade commissions no longer exist.
I think it's important to point out that the conclusions are definitely still the same despite the lowering of trading costs since 2000. Trading is hazardous to your wealth, period.
Which is solely due to the extra cost of short term capital gains tax.
Re: Trading Is Hazardous to Your Wealth [pdf] (2000)
#25Earlier quoted context omitted.
I think it's important to point out that the conclusions are definitely still the same despite the lowering of trading costs since 2000. Trading is hazardous to your wealth, period.
I'm not here to make a case one way or the other, but I would point out the graph at the top of the page numbered 775. Most of the reported difference in net performance is due to the impact of commissions and spreads: As trading goes up, gross return was not impacted, but net return was. Retail investors in 2000 were getting fleeced. (And if you think that's bad, take a look at commissions in 1980.)
Trading used to involve a lot more labor; it makes sense that the commissions have dropped.
Re: Trading Is Hazardous to Your Wealth [pdf] (2000)
#26If markets were truly random, you might expect 50% of day traders to lose money, not 90%. Of course, markets are not random and most untrained humans have emotional biases that actively optimize for losing money in markets.
This is likely a controversial opinion: 90% of the time, someone who wants to break out of the "rat race" or achieve wealth for some future vision should go the startup route, or if the wealth part is not as important, do freelance/consulting. However, I believe there are 10% of people where trading the markets provide the better way to achieve the same goal. The reason being that for certain personality types (you need to be smart, disciplined, and creative to beat the market, and it still requires a lot of time), I suspect trading offers a higher expected value of return than starting a bootstrapped company. Startups, especially those not started by someone wealthy, have a higher failure rate than day traders. If you are not passionate about anything you can get funding for (would SpaceX have been successful if it were Elon's first company?), and you fit the criteria, trading is not as terrible an option as its reputation suggests.
Re: Trading Is Hazardous to Your Wealth [pdf] (2000)
#27On average. Also on average, starting a business is hazardous to your wealth, it's likely to fail. On average, don't do competitive sports, you're likely to lose.
Maybe 'Less Than Excellent Trading Is Hazardous to Your Wealth'? Don't do a trade unless you have an excellent advantage on it...
Re: Trading Is Hazardous to Your Wealth [pdf] (2000)
#28Earlier quoted context omitted.
not any strategy, but any strategy that's reasonably close to the efficient frontier of possible portfolios.
actually, on average, all strategies will perform the same as the market. another way of saying this is: the average of all trading strategies is the market.
no, most strategies necessarily will be losers if not near the efficient frontier. trades average out to the market.
the parent, maybe mistakenly, stated any strategy will have average returns, but consider the naive strategy of putting all of your money in a small number of (often highly correlated) stocks. that trading strategy will underperform the market on average.
Re: Trading Is Hazardous to Your Wealth [pdf] (2000)
#29It's my understanding that, if commissions are free (e.g. Robinhood) then on average, any trading strategy is going to perform comparable to the market average. If you can find any reliably bad strategy (in a fee-less market), then you have necessarily found an outperforming strategy that is the opposite.
Your theory only works with a perfectly efficient market. In practice, even without commissions, there are many other sources of inefficiency in the market that act to reduce your returns every time you trade.
The bid/ask spread is an example of such an inefficiency. Take a hypothetical case where you just buy and sell the exact same stock over and over, but the price of the stock never changes. Every time you complete a bid or sell order, you would lose an amount equal to the gap between the bid and ask prices. Repeat the cycle enough times, and you will lose all your money, but the stock price will never have changed. What's the opposite of this strategy? To never trade at all?
The idea that you can just reverse a losing trading strategy to come up with a winning strategy is absurd, because it completely disregards the entropy inherent to an inefficient system.
Re: Trading Is Hazardous to Your Wealth [pdf] (2000)
#30Earlier quoted context omitted.
I'm not here to make a case one way or the other, but I would point out the graph at the top of the page numbered 775. Most of the reported difference in net performance is due to the impact of commissions and spreads: As trading goes up, gross return was not impacted, but net return was. Retail investors in 2000 were getting fleeced. (And if you think that's bad, take a look at commissions in 1980.)
Trading used to involve a lot more labor; it makes sense that the commissions have dropped.
You're not wrong about the 1980 comp but by 2000 this was automated and very, very profitable for brokerages.