Vol 2, Issue 9. Quarter 4 – 2025.

Before I begin to dig into too much data let’s set up a base case. You can take any and all  money that you do not need to live off of today and invest it into a Global Stock Index Fund such as VTI. This is an extremely low cost index fund that mimics the total return of the overwhelming majority of stock shares traded around the world. This has produced a return of 15.26 year-to date, and a total of 72% over the past 5 years. This is what I mean by the Base Case. When you consider another approach that takes orders of magnitude more effort, you should only consider it if it is reasonable to expect to do quite a bit better than this.

Compare this to any alternative approaches such as day -trading or dealing with very short duration options. Ask yourself a simple question. Is is really reasonable to believe that it will do better than that? Consider the following quotes:

“We show that it is virtually impossible for individuals to day trade for a living, contrary to what course providers claim.. . . We find that 97% of all investors who persisted for more than 300 days lost money. Only 1.1% earned more than the Brazillian minimum wage, and only 0.5% earned more than the initial salary of a bank teller – all with great risk.”

This research was published in 2020 and considered all trades made in the stock market in Brazil from 2012 to 2017. (Chague, De-Losso, and Giovannetti, 2020 Go back and look at that one again. About 1.1% of the day-traders earned more than the Brazilian minimum wage. Maybe that’s enough to live off of if you live in Brazil, but I am willing to bet that you need a lot more than that to live here.

Furthermore, the same paper finds that “The very top frequent day trader in our sample earned only US$310 per day with an enormous risk (a standard deviation of US$2,560).” The study added that it appeared that in the sample where these profits were made, the retail day traders involved did not have to compete with institutional high-frequency trading (HFTs) algorithms, which are increasingly active in today’s market. Unfortunately, this analysis ignores taxes, and training costs, so it actually over-estimates trader profits. They found that among 1551 individuals who traded for at least 300 days 97% lost money. Only 17 people earned more than the Brazilian minimum wage ($US16 per day), only 8 earned more than the initial salary of a bank teller (US$54 per day) and the individual who earned the most earned US$310 per day on average.

Please note that this is using a much lower benchmark than the base case that I discussed earlier. According to another article from 2017 in Forbes, “day trading is the new sexy that gets an inordinate amount of hype.”

A similar work focused on traders in Taiwan (Barber, et.al, 2013) found that “less than 1% of the total population of day traders is able to predictably and reliably earn positive abnormal returns net of fees.” In this context “abnormal returns” means returns above what you would earn with the index fund that I mentioned at the start of this post. Please also notice that the return in the base case is done while putting forth no effort at all. Let me repeat that in a different way. The person holding the index fund outperforms 99% of all day traders. Let that sink in.The paper also found that, “On average individual investors lose money from trading”, and “the majority of losses incurred at one large discount broker in the United Stated can be traced to trading costs.” In other words, even if your trades break even, you still lose due to the transaction costs involved. This work looked at 450,000 Taiwanese individuals. Of this population they find that about 4,000 day traders (less than 1%) go on to earn returns net of trading costs that beat the market. They also note that the spread between the top and bottom performers is enormous (as much as 0.73% per day). This all suggests that for the top 1%, this looks like a feasible activity, but for the bottom 99% it’s a pretty bad idea.

This study in incomplete in several important ways. For one, they state that, “We find some evidence that profitable day traders either use private information (or respond early to public information).”

But let me get to, what I feel is actually an even larger issue. The difference between day trading in stocks, or trading in very short duration options is almost indistinguishable from gambling.  When you win, there is a rush as you just beat 99% of the folks out there. When you lose, you can easily tell yourself, that you just “got unlucky” and your luck will have to turn around at some point.

I do speak from a tiny bit of experience on this topic. I was never a day trader, but I did try my hand as a stock picker in the early 2000’s. I studied a great deal of teaching material from a number of sources including the Motley Fool and placed fairly sizable bets on a few names that you probably know including Starbucks, Nieman Marcus, and Genentech. After dozens of hours of work, and a few months time I noticed that I did “beat the market” by 1-2%. I then realized that the stocks that I owned were each highly volatile, and I needed to keep a keen eye on them to decide when to add to, reduce, or walk away from each position. I eventually realized that the small profit that I made was less money per hour than I was making on my job, and decided that I could find a better use for my time.

One problem with eggheads, is that it doesn’t take much to convince us that we are smarter than the average reader, and one is always tempted to ask. What’s the point in being smart if it doesn’t produce profits? I believe that this in part explains why so many folks who I think should know better, end up on this treadmill, spending hundreds of hours to make a profit that looks impressive until you compare it what what could have been made buying an index fund and relaxing.

This leads us back to our preferred strategy. I repeat it here for your convenience in 5 simple parts:

1. The time to invest is NOW. The amount to invest is the money that I do not need to live off of right now.
2. The correct share of equities in my portfolio is as much as I can stomach.
3. The correct planning horizon is the retirement of my grandchildren.
4. Diversification is the only free lunch that I know of, and I want it at the lowest possible cost.
5. Until I feel like I have a better model, that I can live with in any possible outcome, I am going to stick with my plan. 

Whatever you are selling that deviates from this plan is of no interest to me. Have a nice day!