There are only a few things that I fairly confident about and the idea that the next 20 years will be terrible for long term investors is one of them. Over the past three decades investors have enjoyed unparalleled good luck as declining bond rates, rapidly improving technology and a massive fresh, new pool of savings from one billion Chinese consumers made investing in equities a very lucrative proposition.
Stocks have compounded by almost 8% annually for the past 30 years and all you had to do was drop money every single year into an index fund and you were guaranteed to be rich (or at least much wealthier than when you started). We are now living in the golden age of the index investing with more than 3 Trillion dollars allocated to that instrument. But I have news for you, whenever 3 Trillion dollars is allocated to anything in the financial markets it’s almost certainly a sucker bet, because contrary to the Wall Street propaganda markets are much more like a zero sum game than you think. Here is paper from McKinsey that provides the intellectual foundation for my skepticism about the future of investing but you don’t even have to read it. Just look at the table below that shows 70 plus years during the last century when equities produced “bupkas” as we say in New York.
So don’t bet on buy and hold, because it most likely will not work.
Which bring me to active trading. Now I am first to admit that I am talking my book here. I love daytrading and would probably do it even if I could make more money as an investor. Guilty as charged. I believe that day trading is a superior way to make money not only because it is far less volatile, but also because it is an absolute return game and does not depend on the upward drift of the market in order to make you money.
But it is, by no means easy.
I remember a few years ago I horrified a member of my chat room when I told him that the only way to make 100 pips by day trading is to do 100 trades. He was aghast that it would take so much work to achieve such a paltry profit.
The other day, I suddenly remembered that conversation during our daily webinar and decided to look at my personal trading account which I have banged around for more than 1600 trades over the past year. True enough the average NET profit was 1.1 pips. Feel free to check it out here (just make sure to run the data up to November 7th, because my massive winning trade in USD/MXN wildly skews the average to the upside from the election onward).
When you think about it, my day trading results are not at all surprising when you put them into the contest of the real world. After all, consider toothpaste, gasoline, even running a restaurant. When the business person accounts for all the costs of the business what drops to the bottom line is just 3 cents on every dollar of revenue.
When you start thinking about day trading as a business rather than as lottery based amusement that’s when you get a much more accurate idea of not only how to succeed, but what to expect.
And that’s another reason to be grateful for day trading. When done right it provides us with a much more accurate view of the financial world.