If you're a trader, you're a loser.

Discussion in 'Wall St. News' started by jagadish, Apr 2, 2010.

  1. If you're a trader, you're a loser.

    That's what a Journal of Finance study found.

    As the two Journal of Finance researchers said in their article, "Trading is hazardous to your wealth."

    They studied over 66,465 online trading accounts for a period of six years, from 1991 through 1996. They found that the average trader's returns were about 6.5% less than the overall market. That's even worse than most mutual fund managers, who routinely do about 4.8% worse than the market.

    Nobody ever tells you that actively trading in and out of stocks every day is too risky and too hard for most people. And the more active the average trader is, the more he loses.

    For one thing, there's too much competition. As a trader, you must compete against gigantic firms, like Goldman Sachs, that have billions of dollars of trading capital and armies of people sifting through mountains of information – information they often get before anyone else. Their executives are in touch with the highest levels of government around the world. No wonder traders do so poorly on average.

    Another thing is, most traders have no idea that they should use small position sizes and strict stop losses. They take huge risks against the Goldman Sachs of the world... so one bad trade blows them out of the water.

    There's a much better alternative to getting involved in all this action...

    Building enormous wealth in the stock market is possible – and it's not nearly as complicated as Wall Street, CNBC, and a zillion newspapers and magazines would have you believe.

    If you want to get rich investing, you should listen to someone who has actually done it. Jim Rogers knows. Rogers wrote Investment Biker, about how he drove around the world on a motorcycle, looking for new investment ideas. He's not sitting in front of a computer trading his online brokerage account all day.

    Here's what Roger's says you should do to get rich:

    Take your money, put it in Treasury bills or a money-market fund. Just sit back, go to the beach, go to the movies, play checkers, do whatever you want to.

    Then something will come along where you know it's right. Take all your money out of the money-market fund, put it in whatever it happens to be and stay with it for three or four or five or 10 years, whatever it is.

    You'll know when to sell again, because you'll know more about it than anybody else. Take your money out, put it back in the money-market fund, and wait for the next thing to come along. When it does, you'll make a whole lot of money.

    Billionaire investor Warren Buffett doesn't day trade either. Like Rogers, he's an investor. A few years ago, in Omaha, someone asked Buffett about managing money. As usual, he cut through all the crap and gave simple, easy-to-follow advice that made sense:

    Your default position should always be short-term instruments. And whenever you see anything intelligent to do, you should do it.

    That just means you should keep your money in cash and wait for an investment to come along which you understand well, is safe, and looks like a winner.

    Buffett clearly follows his own advice. His latest Berkshire Hathaway balance sheet shows total cash and equivalents of more than $46 billion, equal to about 27% of the entire company's current market value. That's a boatload of cash. He's been very active the past year or so, but he still keeps plenty of cash on hand. You should do that, too.

    There's just one problem with this simple strategy of sitting in cash and investing only when circumstances are ideal: human nature. Nobody wants to be patient. Everybody wants to buy and sell quickly and make a fortune overnight. Judging from the results in that Journal of Finance study, they really just want to buy and sell quickly, whether they make a fortune or not!

    Of course, the average investor's impatience is just another easy way for us Extreme Value types to get an advantage. We can sit in cash, wait for something too good to pass up, then buy it and hold on.

    What could be simpler than that?

    Good investing,

  2. tortoise


    Jim Rogers is jerking your chain
  3. April 1
  4. hughb


    Who was trading online in 1991?
  5. You haven't been following Rogers lately, have you?
  6. That's a good question.
  7. There is an amazing amount of denial on ET.

    Less than 1% of traders will ever become a longterm very profitable trader. The rest will blow up or bleed money slowly until they sink into the mud.

    But even so, most of them joke and taunt and laugh at stories like in the OP. And then they go back to their paper trading, hoping SOMEDAY, to trip over a real edge...

    Truth hurts.


    Anyone can choose selective time frames. 1991 - 1996 was mainly an uptrending market. I wonder how many of those who were buy & hold mentality investors were happy in the decade that followed the market meltdown in early 2000. Traders likely didn't see their accounts melt down proportionately in line with the NAZ declining from over 5000 to less than 1/2 of that today. And the Dow is basically flat for the last 10 years.

    As far as trading against Goldman etc. -- so what? They're buying size and as a small trader I can get in and out with much smaller trades before they buy (or sell) 500K shares of whatever.

    And Rogers suggestion to take all your money out and put it into whatever you feel will outperform. Sorry, but I think the days of that are far gone. I expect the markets will be more up and down and as a trader one can exploit these moves to outperform the longer term that Rogers suggests. If we're up 100 points one day and down 100 the next the net is 0 for an investor. A trader can play both sides and end up much better than a net 0. Takes work but it's very doable for a decent trader.

    If I listened to these garbage stories I'd not have survived and succeeded the past 14+ years. Like most anything in life, if you want it bad enough, and are willing to work at it, you can succeed.
  9. Good observation. I can tell you in '91 I had a phone to each ear and one over each shoulder.

  10. blox87

    blox87 Guest

    I'm sick of all these types of threads. Ok it's not easy to become a good trader, we get it. Now get back to work before your boss bitches at you.
    #10     Apr 2, 2010