Behavioral-finance researchers have studied the performance of stock market traders in both America and Asia. Interestingly, they discovered that traders in both countries underperform the world’s broad markets by significant amounts. One study analyzed 66,400 accounts at a major Wall Street firm over a seven-year period. Another studied all the active traders on the Taiwan exchange.
In spite of the cultural differences, the results were virtually the same. The odds are against getting rich. Why? Due to the high transaction costs, taxes and bad decisions, the bottom line is simple: “The more you trade the less you earn.”
In fact, about 80% of all day traders lose money. In researching the Americans, one study found that the active investors who turned over their portfolios 258% annually made less than 12% on their money. Passive buy-and-hold investors, with only 2% portfolio turnover, had average returns about half again higher than the active investors.
Trading is bad for your health (and your retirement)
The bottom line is simple: Most traders do lose money. But most are also born optimists, think they’re different, above average, the exception to the odds.
Earlier Forbes reported on a study that the “North American Securities Administrators found that 77% of day traders lost money.” Bloomberg BusinessWeek says 82% of all day traders lose money. The data parallels a study by professors at the University of Taipei working in conjunction with University of California behavioral-finance professors Terry Odean and Brad Barber, the same two who researched 66,400 Wall Street accounts earlier and concluded, “The more you trade the less you earn.”
Get this: Even the traders who did make money in their trading were net losers after transaction costs were deducted. The study also checked whether past winners repeated. They did, but at a very high cost. The average winning trader did in fact repeat as a winner, netting $251 a day after transaction costs.
But overall 82% of all the traders still lost money, an average loss of $45 a day.
Rare 5% have the profile of a winning trader
Successful traders are born. My research on personality types for “The Millionaire Code” tells me most people do not have that unique profile, maybe 5-10%. But they all love the action, the thrill of the hunt, risks, gambling, the pressure, the pounding heart, sweaty palms.
Yes, they want to be heroes. They’re addicted to the adrenaline rush of living on the edge; it’s a “drug” driving them.
Decisions are made within minutes of receiving real-time financial information and signals from their programs. They may move in and out several times a day. Mutual fund investors get day-end quotes, too late to compete. For many traders, 15 minutes is an eternity. After that, breaking news is worthless. Everybody knows it.
Technical analysts, chartists and market timers may be longer-ranged, plan ahead, searching for patterns, rock-solid holding to their system. One successful trader showed me his plan for the day, the two-minute ticks, we tracked them, saw when to get out, all very rational, mechanical.
The personality type of winners is the same, they need to be in on the action, but they’re disciplined, got a system, stick to it, turn on the thrill of hunting for higher returns. It’s a fix, a high, an endless stream of instant gratifications.
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