Editor’s note: This article was first published in January 2019. The comparison figures, such as Buffett’s 24% over 32 years, Lynch’s 29% over 13 years and Graham’s 17% over 30 years, date from that time.
A few weeks ago I made a video giving my opinion on trading, although, rather than giving my opinion, I talked about certain statistics that are out there and shouldn’t be ignored.
This time I’m going to answer some comments from traders, and also compare medium- and long-term investing with trading.
So if you’re a trader, this is for you, and if you’re interested in the stock market it’s for you too, because I’ll tell you about my own experience with trading to clear up a few doubts.
In that earlier video I said that 90% of people who do intraday trading (day trading) every day lose money by the end of the year, and that those who make money generally get a lower return than a long-term investor. In some comments I saw offended traders saying: “That’s not true, because I make money trading.”
Well, as I said, 90% of traders lose money. Congratulations if you’re in the other 10%.
To all the traders who told me they disagree with my theory, I’ve asked just one question.
What’s your average annual return as a day trader?
And that’s where I’ve seen some truly outlandish answers. It’s not that I’m distrustful, but I simply find them hard to believe.
Some told me their average annual return is 50 percent, others 25 percent, and others as much as 75 percent.
I have to say something here. As you know, we published the returns of those considered the best investors in history: Peter Lynch, Benjamin Graham, Warren Buffett…
Warren Buffett’s average annual return over 32 years has been 24 percent.
Peter Lynch’s return over 13 years was 29 percent, and Benjamin Graham’s over 30 years was 17 percent, which isn’t bad at all considering that this man lived through several recessions, including the Crash of ’29. That’s the first fact.
The next reason I find those high returns hard to believe
Those people who sell courses and claim that with 5,000-euro accounts they make 250 euros a day trading 2 or 3 hours a day may not realise they’re talking about a return of 5% a day, which over a year would leave all the investing legends put together in the dust.
I’ll go further. If you could achieve that return, with all due respect, these people would be wasting their time trading, because they could use that genius to become truly rich.
Now, what I have noticed is that some people don’t calculate these figures properly. What I mean is that if one month you get a return of 10 percent (just to pick a number) and the next month a return of 5 percent, some people add them up and say they have an average return of 15 percent.
To calculate it you have to take the average; in this case, the average return would be 5 percent, not 15.
“Carlos, because of your ignorance about trading, you’ll never achieve financial freedom”
This is another comment I came across. And all I can say here is that our ideas of what financial freedom is would clash quite a bit.
If you’re a trader, and all you do is trade without investing in shares for the long term, I’m sorry to tell you that you don’t have any financial freedom at all. If things go well for you, what you’ve built yourself is a job with terrible working conditions.
If anyone has financial freedom, it’s the person selling trading courses or writing books about trading.
And this is easy to explain. You achieve financial freedom when the passive income you receive from your assets lets you maintain your lifestyle without having to work for it directly.
In fact, there’s one question for measuring the health of your personal finances, and it’s simply this: how much passive income do you get from your assets?
In other words, if you’ve been investing for 20 years in shares that pay dividends, and you can live every month on the dividend payments, you have financial freedom.
If, to maintain your lifestyle, you have to take money out of the market every day, you have no financial freedom at all, because if you end up in hospital for 15 days, that’s 15 days without pay.
Another curious fact that shows the return on long-term investing
100 euros invested in Berkshire Hathaway shares in 1965 would be worth almost 2 million euros today. That may seem like a lot, but it’s just the result of a 21.68 percent average annual return. Something similar would have happened if you had invested 100 euros in Microsoft and Apple.
We’re talking here about the magic of compound interest and the appreciation of shares over the long term, something the trader misses out on.
Are you an investor or a gambler?
Day traders close all their positions before the market closes for the day because, supposedly, that way they’re not exposed to any news that may come out while the markets are closed.
See also: Stock market investing: the most profitable investment
Take the Spanish stock market in 2012, when it began a strong rally. If, instead of putting your money in the market for the long term or applying trend trading to catch the whole upward move (there were weekly moves of up to 50 percent in some stocks), you did intraday trading, I’m sorry, but you’re a gambler. You trade because you enjoy playing at trading, and you put having fun ahead of making money on the stock market.
I’m going to make a claim.
Someone who has no idea about stock market investing picks 5 Ibex stocks at random in 2012 and holds them until 2015. No trader got a higher return than this person who knows nothing about the stock market (there may be an exception that proves the rule).
My experience with trading
Some people assume I talk about trading this way because I wasn’t any good at it, and it’s precisely the opposite. In fact, I’ve already been through the phase some of you are going through now.
They say that to learn to trade, you first have to lose. That wasn’t the case for me.
When I started trading I had a very clear system in mind, and I was more like a sniper; in other words, I didn’t trade for the sake of trading.
Some of you will laugh at this, but I only looked at stocks that suddenly fell or rose 20 percent in a single morning. That’s when I started following them, and I only took two indicators into account: the MACD and the RSI.
When a stock caught my attention because of a huge rise or a huge fall, I started following it and waited for the ideal moment when these indicators gave me the green light.
And mind you, there were days when I was watching the price on the screen but never actually traded.
That said, when the moment came and I saw the green light in these indicators and in the trading volume, I went practically all in, with no risk management.
What I mean by this is that, in my case, loss aversion is a bias that doesn’t really apply to me, because to me money is just money. I’ve had a lot of money and I’ve had very little, so it’s something that can go as easily as it comes. And I think this has helped me keep a cool head when investing.
See also: What exactly is stock market investing? Debunking some myths
When I started trading, I could easily lose 500 euros on one trade and make 2,000 euros on another
That’s because I tried to catch a longer trend; in other words, I left the position open until the next day. I placed a trailing stop loss, the kind that moves up with the price as it rises.
That way I won 4 out of every 5 times, but this system was a bit boring, because after spending the whole week glued to the screen I might make just 1 or 2 trades. Still, I was playing it practically safe.
Then I started trading more often, looking for shorter trends and smaller moves, and it started to become a statistical game, because it was all about trading and making sure the winning trades outnumbered the losing ones.
I started making my trading much more professional, and all I can tell you is that that year I paid more than 3,000 euros in buying and selling commissions, and the annual return was 11 percent, which I think is great. But a certain someone, who enjoys being a pain, made me see what I’m trying to make you see right now.
What good was an 11 percent return to me when my long-term share portfolio had returned 90 percent that year, without my having to be glued to the screen all day? I know a 90 percent return is hard to believe, but that’s what a bull market after a recession does. Lots of money with little effort and without much thinking.
Not to mention the time I wasted in front of the screen, time you can use to generate income so you can invest for the long term or build other kinds of assets. That’s where financial freedom lies, not in gambling because you enjoy gambling.
Making money in the markets isn’t hard, as long as you’re an investor and not a gambler
And mind you, I’ve also had some real fiascos, especially with the pharmaceutical company Navidea. It’s not all sunshine and roses.
But the long-term investor has no need to prove that money is made in the long term, because the numbers favour this kind of investing. It’s the people who want to sell you on trading who have to prove that you can beat the market, but the numbers show that it’s the market that ends up wiping out most traders.
Featured image: user:yndesai, CC0 1.0, via Wikimedia Commons.
