Trading vs. Investing: Which One is Less Dumb

“There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly built into human nature, that always gets in the way of human intelligence. Of that I am sure.” – Jesse Livermore

“There are old traders, and there are bold traders. There are very few old, bold traders.” - Ed Seykota

The stock market is like a magnet for overconfident incompetents. 

There's nothing like it in the world. 

Except politics, perhaps. 

Name one other profession where you have regular folks… people of the land, the common clay…

...jumping with both feet into a profession swarming with highly paid mathematical geniuses and people rich enough to bend the law to their will...

Expecting to do exceptionally well. Better than professionals. 

These folks think a Lamborghini and an 8-ball are just a few good trades away, all because they skimmed a chapter in The Intelligent Investor and they learned how to recognize a Bullish Doji Star from a YouTube video. 

It's baffling. 

I can only compare it to someone playing the game of Operation and thinking they're qualified to perform surgery.

It’s the same mindset and worldview on full display at any horse racing track, sports book, or blackjack table:

A melange of confirmation and recency bias, all topped off with the illusion of control.

I had to bite my tongue about this over Thanksgiving, when I visited with two of my uncles, both of whom are active traders. 

(For the sake of clarity, let’s make a distinction between investors and traders: Investing involves a long-term, multi-year buy-and-hold approach; trading involves a short-term, buy-and-sell approach.)

One of them I'll call Uncle Motley. 

He likes to speculate on stocks based on big stories. He's the kind of guy who buys certain stocks because "lockdowns can't last forever" or because a "great reset" is reshaping the American economy.

The other I'll call Uncle Stonks. 

He likes to buy options (all-or-nothing bets) on large tech stocks. 

Both of my uncles...

I love them...

But they've been trying to hit a home run in the markets for at least 10 years now. 

When they do hit one, it's usually after striking out 5 to 10 times. 

When Uncle Motley finds a winner, he often loses money because of garbo exit strategies. 

At least once a year he’ll tell me he had a position go up by 5X or 10X. But didn’t sell in time. 

Rather than set a trailing stop, he just... watched his gains evaporate. 

When Uncle Stonks finds a winner, he often loses money because he tries to roll a big chunk of his winnings into the exact same trade setup. 

“I just need this trade to hit three, maybe four more times and then I’ll never have to work again.”

He says that every year. Every time I see him.

And if that statement doesn’t sound absurd to you at face value…

Just imagine a stranger in a trench coat saying to you:

“If I go to a casino and bet everything I have, I only need to win three, maybe four times to become a millionaire.”

You’d probably think to yourself:

“What’s with the trenchcoat? It’s summertime and we’re in Florida. Seems suspicious.”

Look…

The vast majority of traders lose money:

• One study of Brazilian futures traders found 97% of day traders lost money over a period of 300 days.

• Another study of day traders in Taiwan between 1995 and 2006 found only 5% of day traders to be profitable.

• A study by the U.S. Securities and Exchange Commission of forex traders found 70% of traders lose money every quarter on average, and traders typically lose 100% of their money within 12 months.

• A study of eToro day traders found nearly 80% of them had lost money over a 12-month period, and the median loss was 36%.

And there’s a very simple reason why 95% to 97% of traders lose money:

They all think they're the 3% to 5% of people that won't.

The worst offenders are people with a reasonable degree of intelligence who get into trading...

Because if you're smart, you can trick yourself into believing anything or justifying just about any stupid behavior.  

If you got into trading in 2020 and early 2021 and made some quick money… you probably fall into this category.

My uncles definitely fall into this category. 

They're both intelligent. Educated. 

They both have a grasp of investment and trading principles. 

And while they've certainly made some money in the markets, they're certainly not as rich as they could be if they were actually any good at trading...

Or if they were just batting for singles...

Or if they had a modicum of humility and just bought and held good stocks or ETFs and stopped wasting their time trying to time the markets.

This message is the heart of what I’m trying to say in this shorter-than-normal, quick-and-to-the-point blog post:

Investing is good, but do so with humility and patience. 

If you’re going to succeed at trading, you need way more time and funds than you probably have, and you need an array of strategies covering all possible market conditions.

I know successful traders. 

I know traders that would transact over a billion dollars of their money and clients’ money in a day. 

These guys (they’re almost all guys) were up at 4am every day reading 10Ks and looking at charts and backtesting strategies and setting up their watchlists and looking at pre-market price movements.

Trading…

Real honest to goodness profitable day trading…

Is exhausting work. 

It is profoundly emotional, mentally taxing work that takes a toll on a person’s mental health and relationships.

The people I know who succeeded at it often suffered from depression, anxiety, suicidal ideation, drug addiction, and manic thrill-seeking behavior.

And many of them still ended up blowing up their portfolios at one point or another.

Why do you think so many traders eventually write books, launch courses, or become gurus?

So here’s what I’m going to do…

I’m going to pull out some QVC informercial, salesman rhetoric for you…

If you’re a trader who has been losing money in options or tech stocks or meme stocks…

It doesn’t have to be this way!

I’d like to pose a challenge that will help you get wealthier without having to spend a single moment trading, researching, or thinking about the stock market. 

So do you want to build the habits of millionaires?

Do you want a no-brainer, automatic way to begin building wealth in the markets and in your future?

Do you want to sleep well at night, knowing that you’ve begun building the foundation of your fortune?

If so, I want you to join me in:

The Finance Daddy $10 Daily Challenge

The purpose of this challenge is pretty simple:

To get at least $10 richer every day in 2022.

All you have to do is…

Invest $10. Every day. 

That’s it.

…

Sorry, lost my salesman mojo there.

But seriously: That’s the challenge.

Put aside $10 to invest every day. 

$10 is not a lot of money. 

It’s a little more than the cost of a Big Mac meal. It’s two lattes. 

If you’re well off enough to be able to think about your finances and investing in the first place, you can afford to do this.

And you should be (just read the takeaways from last week’s blog post).

If you do this and you automate it, you will end the year with about $3,500 you don’t have now. 

So if you think you have what it takes to build wealth and complete this challenge…

Here’s what you do:

> Set up a recurring daily purchase of a stock in a brokerage app or account of your choice. 

- If you don’t have a brokerage app yet, the DIYwealth team has prepared a list for you here, showing you which ones won’t charge you any fees and take only minutes to set up.

- If you don’t want to invest your money, just set up a recurring daily bank transfer to a savings account. 

- If your brokerage doesn’t support recurring investments, try to transfer $70 per week into your account. When you have enough to buy a share of a stock, buy it with the accumulated funds. 

What do you buy?

Pick one: $JEPI, $DTD, $DES, $SPHD, $SCHD, $PFF, or $TDIV.

Or pick a fund of your choice, as long as it pays a safe dividend. 

It doesn’t matter. As Mary Oliver wrote: Let the soft animal of your body love what it loves.

Regardless, I downloaded the Robinhood app and began a daily purchase of these two:

To be honest, I originally started this challenge as a bet with a fledgling day trader…

Because he’s making the same mistakes my two uncles are making…

Poor due diligence. Small capital basis. He’s placing a trade in the morning before work and so failing to time his exits correctly. He doesn’t understand or care about what he’s buying or why beyond some meaningless squiggles on a chart.

My bet is: Keep trading for fun. Every day I’m going to buy $10 worth of the something that pays me dividends. 

At the end of a year or two, let’s see who ends up with more money accumulated.

Reader, I hope you’ll take my side of the bet.

Even if we “lose” the bet and the trader turns out to be a savant, we’ll still end up with money invested that we didn’t have before…

Collecting that sweet, sweet passive dividend income.

If you’re a trader or taking a course and you think you can win this bet…

It’s on. Let’s do this. 

Reach out and we’ll figure out a way to make this an apples-to-apples comparison.

If you win I’ll think of some prize to give you.