Photo (cc) by Lars Plougmann
This week’s question comes from a longtime reader who wants to make a living the same way I do — getting out of bed in the morning and sauntering over to a computer. But he’s choosing a completely different way of doing it. Instead of writing articles about money, he wants to earn it by trading stocks.
I’m pursuing a career as an active trader and investor and believe that one can make an incredibly good living as an active trader. But from reading your articles on investing, you seem to think it’s not a good approach. And I understand that the average day trader loses money. My approach is all-inclusive, ranging from short-term trading to long-term investing, with a great deal of study and practice (paper trading) to go along with it.
In your comments above the list of stocks in your portfolio you say, “I’m an investor, not a trader. In my opinion, trying to time the market is a fool’s game.”
Can you tell me why you said that? I respect your opinion and am interested in what your thoughts are on this, as I’m aggressively pursuing this course for myself.
Here’s your answer, Dean!
When I started in television news nearly 25 years ago, I had no experience, no pertinent educational background and no connections. Anything’s possible. There are people who make a living at virtually everything, from playing golf to lion taming. So I’d never suggest there’s something you can’t do.
But from my experience and observation over many years, making a living trading stocks is tough.
What I’ve seen and experienced
Before adopting TV news as my chosen profession, I was a stockbroker for more than 10 years. During that time, I tried short-term trading for my own account. I failed to consistently make money. Then I formed a partnership with two knowledgeable friends and tried to use a trading strategy we developed to trade index options. It took several months, but we ultimately lost our entire $10,000 pooled investment.
Among my 1,000 or so clients, I also had a handful who attempted to trade their way to riches. Not one succeeded. Zero.
I had two close college friends who went into the commodities trading business, one in New York and the other Chicago. It took years, but ultimately both failed. I used to know a floor trader in New York who made a killing in silver back in the 1980s. He subsequently lost it all and went bankrupt.
That’s why I say, “I’m an investor, not a trader.” I didn’t form this opinion by reading a book. I attempted to do it on more than one occasion and had my hat handed to me, as did virtually everyone I’ve known or observed over the last several decades. So you’ll understand why I’m skeptical.
At the same time, I’ve found that while trading is a tough way to make money, investing in quality companies over long periods of time isn’t. I’ve demonstrated that right here by publishing every stock pick I’ve made since 2008 in my online portfolio.
It’s not just me
There’s a mountain of evidence suggesting market timing is tough. For example, despite the fact that mutual funds employ both the smartest people and best technology on the planet, the average professionally managed mutual fund underperforms a simple, unmanaged index.
Then there are the gurus. Wall Street is littered with the bodies of market-timers who thought they had it right, but ultimately got it wrong by missing giant market moves, both up and down.
Among investors still standing, the most famous is undoubtedly Warren Buffett, and he’s certainly no trader. He’s said on more than one occasion that his favorite holding period for an investment is forever.
Where are you learning it?
I did my first story on day-trading schools about 15 years ago. These are schools that recruit would-be day traders by promising them that successful short-term trading techniques can be taught — for a hefty fee. Some students may successfully learn techniques to make money, but even the first guy I interviewed who owned the school admitted that most of his students lose their money and wash out.
Whether it’s day trading, market timing or any other short-term investing system, if you’re paying money to learn it, there’s an elephant in the room: If the teachers are so great at it, why aren’t they doing it instead of teaching it? Trading stocks in your boxer shorts at the kitchen table for a few hours a day sure sounds a lot simpler than leasing office space, advertising, recruiting and teaching.
The very fact they’re charging to teach it is evidence it doesn’t work well enough to make a living.
The bottom line
As I said at the outset, I’m a firm believer that anyone can do anything they set their mind to. There are people who play poker professionally, and there are people who trade professionally. But they’re few and far between and, in my opinion, have a special gift. They can teach you techniques until the cows come home, but they probably won’t, because they don’t have to. And even if they did, I suspect that, like professional athletes, they’ve got something that can’t be taught.
None of this means, of course, that you shouldn’t learn everything you can about trading, market timing, poker, golf or anything else that interests you. Sharpening your skills is always a great idea. But there’s a big difference between learning to be a better investor and making “an incredibly good living as an active trader.”
If you go forward, Dean, let us know what happens. I’d honestly like nothing more than to be wrong and for you to get rich.
Then maybe you’ll open a school and teach the rest of us how you did it.
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I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.