No, you won’t make money trading stocks
YAY !!!! A POST WHERE I GET TO SHIT ON YOUR PARADE LIKE A FLOCK OF LAXATIVE RIDDEN SEAGULLS ON MEMORIAL DAY!!!
On the list of things to do online that can make you a ton of money with very little effort is “stock trading”. The allure is easy to understand. After all, trading stocks really isn’t taught in school, so you don’t need a degree for it. Anyone can set up a brokerage account, press buy and sell when someone on the internet told them too, and just let the moolah roll in. And it requires literally no physical effort. Short of clicking a mouse. Which you should have no problem with.
So why am I dropping a dynamic deuce on those who think that they can trade? Well, for 99.999999% of you out there, you simply don’t have the time/money/technology/smarts to out-trade those in the business. And since we’re talking about a pretty easy to understand market, that means that though people think they understand trading, they really don’t. And the guy/gal who’s on the other side of that trade? Yeah, they’re going to take advantage of you and make you buy something that’s overvalued, or make you sell something that’s not.
So here we go: why you’re never going to make any money trading stocks.
First, story time…
Through many very wise financial decisions, my father was able to live out many a financial bloggers dream and retire at the wrinkly and denture-y age of 44. His degree in accounting and ability to mind-fuck car salesmen allowed to him to earn enough money so he could achieve this goal. However, the one thing that did not allow him to do this was an uncanny ability to trade stocks.
In fact, my dad has summarized his ability as follows: “Paul, here’s how you know what stocks will go up: you look at the ones I picked, and buy every other stock but those.” Much to my chagrin, I kind of took this advice and was able to amass a pretty sizable investment portfolio by the time I was 25. Low-5 figures. Nothing insane, but not bad for 2 years of full time work.
However, he has since decided to give stock trading a go. Now, Dad, if you’re reading this, I love you to death. But my dad has about as much right to be a stock trader as I do being an alpaca farmer; there’s just a lot left to learn. And he’ll tell me about the predictions he made, and why he made them, and they’ll sound good at the beginning. But as soon as I throw my finance degree at his face and say, “Ok but WHY is that happening? How do you know that’s going to continue today? What exactly are the risks that you’re taking?” I don’t get very strong responses.
In keeping with the, you’re not going to trade your way to millions, I have ANOTHER friend who was really into stock trading. Let’s call him “Steve”. Steve is a good friend of mine from college and was into not only trading stocks, but options as well. There was one stock that he was following pretty religiously: a biotech stock whose name escapes me. Anyone, one day his options went up nearly 10x their value. In one day.
Needless to say, he had 5 figures in his account that he didn’t have the day before. I was shaking; he was doing some mix of epileptic seizure and happy dance.
But as they always say, “What goes up, most come down“…
And boy did it ever come down. Not terribly mind you, he still did great in terms of absolute returns. But if he had just sold that day, he would have had the down payment for a house. That’s not bad.
My point of these stories isn’t to tell you that you should gamble your money on unknown biotech stocks, but that when you don’t know what you’re doing, you really can lose your shirt.
5 reasons why you can’t make money trading stocks
Reason #1 – You’re not a computer.
No, you’re not. Contrary to what you might have mistook for machine like focus and energy while you were on an adderall-ridden study session, you’re not a machine. And this is an important fact to realize:
That means that you have a 50% that when you’re buying or selling a stock, that there’s a computer on the other side that can not only move in and out of trades faster than you, but can synthesize literally billions of pieces of data in less than a second. And you might be wondering, “How fast can that computer really trade?” Well, you’re looking at one trade every 10 milliseconds or so. Just to give you a reference, a fast blink would take 300 milliseconds.
Yep, you blink, and computer has already gone in and out of at least 30 different trades.
So let’s see, who do you think is making the more informed decision: hot-shot 27 year old who graduated from his state school with a degree in English, or the super computer that’s literally designed to take advantage of that schmuck?
hmmmm… I wonder…
Reason #2 – The guy who programmed that computer is way smarter than you.
… And this is the other side of the argument for those of you convinced you can still trade. “Well, maybe the computer is wrong.” And I’ll grant you a little slack there. In fact, HFT caused this to happen to Knight Capital:
For those of you that aren’t experts in the stock market, when the line goes down that fast in a day, that does not bode well for the company.
But for most of the time, like 99.999999% of the time, the person that’s behind the computer designing not only the guts of the computer but also the code, is likely 10x smarter than either you or I.
They’re creating programs in languages you’ve never heard of, using math that would make you vomit on sight, to trade stocks you’ve never heard of, faster than you can blink. So yeah, chances are they’re making more informed decisions than you, and faster than you can make them. And since half the time you’re trading against them anyway, I’m going to say that they’re going to come out ahead…
…not you, boo boo.
Reason #3 – You have no idea why a stock price moved.
I remember having this argument with my marketing professor. He said, as do pretty much all academics, that the only reason that a stock price is going to move is because the expected future cash flows have increased. And to the theoretical economists among you, he’s completely right.
However, at the end of the day, there are only two reasons that the price of a good or service increases, and that’s either because there is MORE DEMAND OR LESS SUPPLY. Either way, if I make something more scarce, and it’s something that people want, then the price of it is going to increase.
Now, as for why STOCK prices increase, there are a myriad of different reasons why people think it goes up. “There’s a head and shoulders formation that results in an uptrend 79% of the time!” “The expected future cash flows have increased!” “It’s the 13th Tuesday of the month and it rained today!” But long story short, the only reason stock prices go up is because either a LOT of stock has just been bought, or there has been a reduction in supply (maybe from a corporate buyback). You’re not going to be able to ask the entire market whether or not they’re going to buy Apple, Inc. stock today, and you’re certainly not going to be able to get buyback information back from a large corporation. There are lot’s of laws against that buttercup; sorry to have to break it to you.
Reason #4 – There’s a reason brokers charge you per trade.
If you’re into sales, then there really is no better business than brokerage. Think about it: your job is simply to facilitate trades, no matter how well/poorly they go for the interested parties. And this goes not only for stock brokers, but real estate brokers, prime brokers (hedge funds) and business brokers alike. Just help them make the trade. If they lose money, you still get your commission. If they earn money, you still get your commission.
And yes, of course, we can talk about the fiduciary duty of those agents, but a promise to be good to your customers really doesn’t hold up that much in this world. And when it comes to stock trading, it’s easy to win you back if something doesn’t go your way. After all, how much literature is out there saying that you can totally trade stocks for a living? How many anecdotes are around that your uncles best friend’s college roommate can just sit at home and trade stocks all day? My point exactly.
Reason #5 – Your brain won’t let you.
I’m not going to give you all the psychological details here because frankly, I wrote a really great article about it here. But essentially, there are 4 behavioral finance mistakes that everyone, everyone, makes. For a quick summary, check this out:
No, You Won’t Make Money Trading Stocks – The Wrap Up
I promise you, I don’t take joy in crushing your hopes and dreams… HA, that’s a lie. However, I promise that I’m doing this for your own benefit. Remember, you’re pretty much never going to make any real money trading stocks. Inc case you forgot, here’s why:
- You’re not a computer. You’ll never have the sheer intellectual capacity to rival how fast those magic boxes compute.
- The guy/gal who programmed those computers? He/she has Ph.D’s coming out of his/her butt. Your four year degree simply doesn’t give you the expertise you need.
- You can sit there and think you understand what moves stock prices, but remember: just because something is correlated doesn’t mean it’s causative. To prove causality, you need experiments. And you’re never going to be able to control for all the thousands of variables at play in the stock market.
- Brokers charge you per trade because they really don’t care whether you win or lose; they’re getting paid no matter how great or poor of a trader you are.
- YOUR BRAIN IS LITERALLY DESIGNED NOT TO ALLOW YOU TO WIN AT TRADING STOCKS!!! THERE ARE FINANCE PROFESSORS WHO MAKE THEIR ENTIRE LIVING PROVING THIS!!!
So go ahead now; fight me. Are you one of the few people with the talent, drive, and oh yeah, LUCK, to successfully trade stocks over the long term? Or are you on my side of the aisle, thinking that there’s pretty much no one that can do this properly over several years/decades?
Keep trying to crack the code,