So, as best as I can tell, buying stocks of Amalgamated Centrifuge for 99 dollars a piece at 10:02 AM, and then selling them for 102 at 10:04 AM seems to be much different than long-term investment for value. If anything, it has a feel of a game like poker, where while there are psychological “tells” that influence your decisions, chance or luck still largely influences how you do.
Is this a fair analogy? Is there more to know about how day trading works? What else is there to know about the practice that influences a trader, perhaps making it more seemly than I’ve outlined?
I have a friend who has made a good living as a day trader for the last 15+ years. He has bad days and even bad months but overall he lives a good life, has savings, bought a house from his day trading. Like with poker, most people do not have this skill and for them it really is like gambling.
Day traders typically don’t care about the underlying value or prospects of the company. Those are only of concern to those who intend to hold the stock for longish periods of time.
They care what other investors might think about those things though. The way you make money day trading is to predict what the wider herd of investors is likely to do, and stay in front of the herd.
But how can you reasonably determine the direction of “the heard” on a mere hourly basis? I can’t believe there’s enough information to come out about a company that would effect a swing multiple times in a single day.
If you want to call all investing gambling, then yes. Heck, all of capitalism can be called gambling if we’re going to redefine it so. “I’m going to take a chance with all this money on some crazy business idea.”
My friend’s father, after retirement, became a day trader - he made about $60k the first year: not a fortune, but a comfortable salary. He was still making money after about 18 months but gave it up. It was just too much work, staying glued to the computer with one eye on CNBC all day.
I don’t know how, but it’s apparently possible. My brother has been a full-time day trader for the past ten years, and has done quite well for himself. He’s developed some data analysis algorithms that work with real time stock price feeds, and even fill out the transaction web pages for him; all he has to do is click “OK” to make a sale/purchase happen.
If it was simply a matter of gambling, I would not have expected him to be consistently successful for ten years. He won’t divulge the nature of his analyses, but whatever he’s doing, it ain’t gambling.
I’m a professional trader. Some of my trades are very short term. I am always looking for trades where I have a positive expected value. I accept risk only when I conclude that the potential reward outweighs the possible downside. There is definitely uncertainty involved, but what doesn’t involve uncertainty?
I hate casinos. I never gamble. I find the idea of risking money with a <50% chance of winning quite stupid.
I’m a professional proprietary trader for a Wall Street firm - and I think this is the easiest way to look at it. Gambling and Trading/Investing are:
SIMILAR, in that they both entail risk and reward. Each one is is a probabilistic bet.
DIFFERENT, in that in gambling, the rules are set and the odds of winning are <50%, so over time you are a guaranteed loser. In trading/investing, hard work and experience can move the odds of winning to >50%, sometimes dramatically so. As a result, it is possible to be consistently profitable in investing/trading (though obviously not guaranteed).
The key is the hard work and experience factor with trading. As someone who knows nothing about trading or is unwilling to put in the work, your odds of success in trading are very low, and would probably be better off gambling.
I’ve always seen it like Truculent Gentleman does. In gambling, the house sets the odds so that gamblers lose over time. Only in games like poker do you stand a chance of really winning in the long run.
In the stock markets, the general trend is up, so it’s almost like saying the investors are the house in that situation. Maybe it’s still gambling (I usually call it that because of the higher risk involved than long-term investing) but at least the odds are on your side.
Of course, the most important difference between gambling and the stock market is that investing is not a zero-sum game the way gambling is. One person’s win is not necessarily another person’s loss. The day trader may make a profit on the spread between 99 and 102, but the person selling at 99 may have realized a profit and the person buying at 102 may also realize a profit. And day traders (or at least, people who buy and sell frequently at high volume) are an important “lubricant” to keep the markets running smoothly and efficiently.
I have read many articles over the years on this very subject and they have all stated with near categorical certainty, that the vast majority of traders lose money. If you doubt this, just look at the returns for a random sample of mutual funds for the past 20 years (or some other suitably long time horizon). I guarantee that the percentage who consistently did better than the market (AFTER fees) will be precisely ZERO.
One of my professors was an expert on portfolio theory and had studied the matter extensively. The most you can do as an investor is to diversify as much as possible. That will allow you to approach overall market rates of return - which is the best you can hope for in the long run.
I’m a city boy, but this was brought home to me in rural Thailand. A farmer must decide which crop to plant and when. The cost of seed and fertilizer might represent a month’s income. They’re making big bets. (Unfortunately, with drought and excessive flooding when it does rain, many of these bets have turned bad lately. :mad: )
I guess Warren Buffet didn’t get the news.
(For that matter, since nearly all small amateur investors underperform the average, the fact it’s a fixed-sum game makes it a mathematical fact that smart pros will overperform!)
Yes, which is why I used that particular game in the OP; because of the fact that many will argue it is a game of skill rather than “gambling” in the sense of a slot machine or craps. The fact that several people make a living at it, but many, MANY more probably lose a small fortune only strengthens my original thought that it is a variety of gambling, albeit much more of a skillful gambling than roulette et. al.
Trading seems a lot like playing the horses. If you put in the time to study the horses, track conditions, etc. you can probably do better than the average player. And in both, you are not competing directly against other players but your payoff depends on how other players bet. If you can spot a winner before the others do it can pay off big.
I don’t agree that many people are losing a fortune at day trading. Most day traders only “lose” in the sense that their returns are sub-par. As an example, I did taxes for a day trader who was very pleased with himself for his gains. But when I looked at it, I realized that the overall portfolio had increased only about 3.5%. This was three years ago, when even a CD would get you 4.5% at no risk, and a broad index fund should have been hiting 8-12%. So I would call him a loser in his gambles that year… but he still had more money than when he started, and he was still beating inflation by a healthy margin.
And again, the stock market isn’t a zero-sum game. In a poker table, someone makes money only when other people lose money, and the house takes a cut so that the total amount of money in the system keeps decreasing. In the stock market, the total amount of money increases over the long term and it’s possible for everyone to make money at once. Over the long term, only a tiny tail of the bell curve actually loses anything.
So… poker is not a bad comparison, and I do liken day-trading to gambling, but it’s important to emphasize the differences between the two “games” If you have to feed a gambling addiction, it might as well be on the stock market.
A closer gambling parallel might be wagering at the horse track. It’s clearly not simply a series of independent trials as in many casino games, but any analytic model for predicting performance doesn’t really seem that reliable. As with the stock market, you have reams of past data (the racing forms). And you have odds set by the activities of the other bettors, many of whom are following very irrational decision processes to arrive at their bets. Finding a horse going off at longer odds than merited is a rather good analogy for trying to find a stock that has been undervalued. You are trying to handicap the psychology of the other players versus the real potential of the horse in the race.
Lack of a reliable analytic model for something which is clearly not simply random would apply to betting any sporting event. Tom Brady isn’t a random number generator, but trying to say how he will perform on a given day with any degree of accuracy is very subject to error. Horse races, though, have the parimutuel wagering system which is a closer analogy to a market.
ETA:
Heh. Somebody else made the same observation while I was typing. Let it stand.
Well I’d imagine they don’t exactly shout it from the rooftops.
They’ve stated many times that paid money managers themselves struggle to beat the market on a regular basis, so I don’t understand how day traders would be any different. What advantages do day traders have that these other fund managers do not that allows them to do beat the index in the long run?
Indeed. But with a horse race there’s a definite beginning and a definite end where you are paid out. I don’t understand what could change to allow XYZ to be a “Buy” at 2:00, but a “Sell” at 4:30. Unless the point is just to ride a stock’s regular volatility and be happy with a few basis points a day.