Investing
Trading is for Losers
With ever lower transaction fees, instant execution and an incredible amount of information freely available on the internet, day trading seems to be becoming very popular. It certainly is within reach of most investors, and it’s easier to accomplish than ever before. For those of you in the dark, day trading is the practice of buying and selling stocks within the same day in the hopes of turning a profit. The idea is simple: if we can buy at the bottoms and sell at the tops consistently, we’ll be filthy rich and have sex with lots of beautiful women. Now, for some people, day trading is out of the question because they cannot give their full attention to the market all day long. In fact, the average investor will hold his stocks for a period of seven months before he sells them. This is called short term or swing trading; and while it’s better than day trading, it still doesn”t beat buying and holding.
Statistically, trading just does not work. Most traders lose, and the ones who win can’t even match the market, let alone beat it. Odean and Barber released a study that followed the progress of 78,000 household investors over 6 years time at a big brokerage firm. Can you guess the results? The investors who traded the least averaged 18.5% annually (close to the market index’ 17.9%) while the investors who traded the most averaged only 11.4% annually! Surprised? You shouldn’t be.
If you’ve read this far, you’ve most likely heard of a man named Warren Buffet. Mr. Buffet is a long term investor: he does not trade stocks, he buys stocks.
“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.” (Source: 1996 Berkshire Annual Report)
Now ask yourself, who’s the richest trader you’ve every heard of?
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I would not even waste my time day trading or any of that as I think that trading is for losers. Instead, I would learn how to pick an index fund with low initial […]
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Um, George Soros? How about Jesse Livermore? John W. Henry? Shall I go on?
Jesse Livermore? He went bankrupt plenty of times.
John W. Henry? His firms assets fell from $3.8 billion in 2005 to only $500 million in 2007. That’s an 85% decrease in two years. Meanwhile, the market was going up and long term investors making money
T. Boone Pickens, Paul Tudor Jones, Richard Dennis, Stevie Cohen, James Simons, David Shaw? I can keep going. You can name maybe Warren Buffett (two ‘t’s) and … Eddie Lampert?
Sure, Jesse Livermore went bankrupt four times. Only between a couple of those times he was the richest man on the planet, and every single time he came back. Doesn’t that sound like fun to you? Hey, even Vic Niederhoffer is back in business! Remember Vic?
My point: trading’s just a different way of life, not an obviously inferior method for morons, like you imply. Don’t get me wrong, DAY trading off the floor/retail is like writing a personal cheque to your brokerage (and divorce lawyer), but even Vic’s mean reversion makes money for a few years until the trend followers eat him alive.
Warren Buffett didn’t buy and hold like a housewife, he knocked on doors! It’s all he’s done for over 50 years. The guy’s completely monomaniacal about investing. Are you suggesting that the average investor knock on GEICO’s door until the janitor lets you in like Warren did in 1951? You’re oversimplifying.
Interesting read you two. Please keep it coming but keep it civil.
Warren buffetts done plenty of trading in his private capacity ie non Berkshire-around the late 70s he traded copper futures as well as traded on margin and shorting the s&p in the 1990s.
His private investing habits are way more adventurous than his Berkshire acquisitions.
Also hes used lots of arbitrage investing at Berkshire for short term gains.
Buffets non berkshire wealth is estimated to be usd300-400 million.
His foray into the steel and forex markets in the last 8 years are surely not forever time frames?
Just a thought-during the 1987 market crash-Buffett sold EVERYTHING apart from his three permanent holdings-doesnt sound like a buy and hold strategy to me!