99% of Day Traders Do Not Make Money

  • Only 1% of day traders make a median of $66,000 per year
  • 20% of the least active investors make an average return of 18.5% 
  • Build a portfolio of 15 to 30 stocks maximizing your chances for above-market performance (10%)
  • Invest in “Growth” companies with increasing operating cash flow and strong cash spending on infrastructure
  • Invest in innovative companies that can disrupt the current major industries  

Day Traders Lose a Lot of Money

If you had an 80% chance to lose up to $25,000 in just one year, would you do it? Of course not. I am talking about day trading here or the art of buying and selling the same stock in a single day. This type of stock trading performs poorly compared to investing, yet day trading has captured the attention of millions. Why?

Only 1% of Day Traders Can Predictably Make Money

Generally day traders lose money. Only less than 1% of day traders can predictably make money time and time again, earning a median profit of $66,000 per year. The other 19%, earn a median profit of $8,400, and the remaining 80% lose up to $25,000. Individual investors account for 99% of day traders, and 95% of day trading volume in the market.  

PDT Rule Prevents People from Trading Too Much

Traders often trade with accounts greater than $25,000 since any accounts lower than the $25,000 threshold is banned from day trading due to the Pattern Day Trading (PDT) rule. The Financial Industry Regulatory Authority (FINRA) sets this rule to protect U.S traders.

More surprisingly, experienced traders whose aggregated performance are negative continue to trade despite extensive experiences of loss. The chance for a one-off life-changing trade keeps losing traders hooked. Research has shown that the mindset of these kinds of “experienced” traders is similar to that of lottery players whose brains show classic signs of addiction.

Investing Can Earn You a Return of 18.5% Each Year!

I have established the facts behind day trading. Yet, I doubt I will change the minds of day traders after just three paragraphs. But just hang on for a moment because I want to show you an alternative to day trading — Investing.

Investing is similar to day trading but operates on a longer timeframe and under a different theoretical framework. When you invest, you hold stocks for months, years, or decades, eliminating random fluctuation in prices that you can’t predict. You “buy” and “sell” base on the fundamental value of a company hidden in its balance sheet, income statement, and statement of cash flow.

Interestingly enough, 20% of the least active investors earn an annual return of 18.5%, while 20% of the most active investors earn an annual return of 11.4%. Even in investing, the less you trade, the more you earn.

A Portfolio of 15 to 30 Stocks is Best

In investing the number of stocks you hold will affect your return. Your chances of beating a 10% return from an index fund, the Russell 3000 index, increases as you hold more stocks until it peaks at a portfolio of 30 stocks (41%); which, then, your chances of beating the index decline. With a portfolio of 15 to 30 stocks, you minimize your chances of underperforming against the Russell 3000 and maximizes your chances of beating it – the perfect combination of high performance and safety.

Mature Companies Underperform Overall

Regression to the mean is the tendency for all stocks to perform like everyone else over time. For example, ExxonMobil (XOM)’s stock increased at a rapid pace for almost 20 years until 2007. After, 2007, the company’s stock price has been trading at a range of $60 to $100 for 10 years now. The oil giant has already saturated the market and is unlikely to see another 2,500% growth in its stock price.

New technological innovation and increases in demand may increase the price but there seems to be no indication of that at the moment for XOM. Also, new players like Tesla (TSLA) is changing our views on electric vehicles. Therefore, you should invest in growth companies who have not peaked yet in performance. What are they? and how do you find one?

Growth companies have an ever-increasing operating cashflow, innovation, and strong spending on infrastructure. These are the companies whose stock prices are more likely to outperform the market shortly. 

Innovation Can Help You Determine Which Stocks to Buy 

Innovation destroys and creates new industries. Some major hedge funds, like Ark Invest, focus exclusively on this topic when considering which stocks to hold, sell, or buy. For example, the investment company focuses on topics such as deep learning, blockchain technology, genome sequencing, robotics, and energy storage. They predict that innovation is a catalyst for growth, and growth equals profit.

I can’t tell you exactly what stocks to pick but I can tell you that you should not day trade and that you should instead invest in 15 to 30 companies with strong potential growth – large cash reserve, growing operating cash flow, technological innovation, and investments in infrastructure.

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Link: Behavioral Finance Investing 

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