Day Trading Loses Money

In the most recent episode of AWM Insights, Brandon, Erik, and Justin debate trading versus investing, how professionals’ value public companies, and how fantasy sports is a good comparison to investing. In the news, Tesla has purchased Bitcoin which should not be a surprise as Elon Musk frequently tweets about it. Bumble, the dating app, debuted and jumped in the most recent technology IPO. Here are some takeaways:

Can you make money trading stocks?

The short answer for anyone reading is no. There is always a chance you could get lucky in the short term but there is no proven strategy that reliably produces excess returns in the long run. If there was such a strategy no one would ever divulge the details. See the Medallion Fund. There are an incredible amount of professionals spending lifetimes trying to exploit trading strategies and market arbitrages. It is pretty unlikely a retail investor at Robinhood will have an edge.

The stock market can be an expensive teacher for the novice investor and the price of tuition is sometimes very high. If you lost money on the GameStop mania and are left bagholding with 70%+ losses, now is a good time to be humble and develop a financial strategy that has a higher probability of long-term success.    

“when you start to look at this, right, and if you want to be a successful long-term investor, you have to look at these things and go "Are the odds in my favor" and the answer quite simply as absolutely not”. Brandon backs up this with the data here and here.

Often ignored is the opportunity cost of all that time spent staring at a screen with bar charts and quotes. Ask yourself if there is something else you could be doing that reliably makes more money. It could be starting your own business, a graduate degree, new skills, anything that has a higher chance of improving your future earning potential.  

The only guarantee in trading: more taxes

Trading stocks is horribly tax inefficient and generates Short Term Capital Gains. These short-term gains are taxed at ordinary income tax rates, which is probably 37% + your state’s top tax rate. Compare that with the Long Term Capital Gains rate of 20% and you can see why being a long term investor makes more sense for the high earners and wealthy.  

How do you value a company? Speculating vs Investing

Value and price are rarely the same. The stock market as a whole and individually moves between undervalued and overvalued and no one knows which is right until after the fact.

How do you value a company? How do you make an investment? And you put some sort of input into an expected future cash flow, and then bring that back to the present and say, "Okay, here's some relative reasonable form of valuation that I'm willing to pay given that the future is unknown, right? -Justin

What Justin is describing is the foundation of investing. There are 150,000 Chartered Financial Analysts in the world and Justin is one of them. The process of forecasting and estimating future variables is extremely difficult for even the most well-trained. A discounted cash flow or DCF model is just the beginning. There is an incredible number of variables that must be modeled out to come up with a value with any meaning. If you have interest in learning more about valuing individual companies check out this blog by Aswath Damodaran.

Fantasy Sports and Investing

“I think a great analogy for so many of our listeners, whether you are a professional athlete or you're just a fan of sports, and we play fantasy sports, is we've seen the world of business just infiltrate sports in analytics, whether it's from the movie Money Ball, or this is just in every single sport that you see today. You'll hear them talk about the analytics. That's a fancy way of saying drivers of return. What they're doing there is going, ‘Is there a way to predict who is going to be successful inside the structure of this given game?’ So when you see these analytics there ultimately it's data that they're trying to predict. How do we construct a portfolio, i.e. a team of players that's going to produce as many wins that results in profits for the company, for the team”. -Erik

I really love this comparison because long term investing is about giving yourself the highest probability of success. Brandon frequently mentions on the podcast that if you want to buy an individual stock you have to answer the why. What is your reason for buying? Is it only because it has gone up a lot? That did not work well for GameStop buyers recently. Buying on emotion never works out well and why so many investors do so poorly. The emotions and biases that influence setting up your fantasy team are the same that hurt your investment returns. Using the evidence and data to invest removes the emotion that can harm returns.  

Why is it like this?

The profits of Wall Street firms and media companies are generated from trading and poor financial literacy. If you are lucky enough to be a high earner and do not have a Certified Financial Planner that does tax strategy, please find one as soon as possible. Even if it’s not us, every day that you fail to act is costing you money.

“I think we all empathize, right? Like we all would love to get lucky and in to make a quick dollar, right. I think that, that's the allure of this that makes it hard. It's also the value of having great advisors, great certified financial planners, and chartered financial analysts, and certified private wealth advisors who are going to coach you through this, because it's not easy. The media is telling you, you are missing out”. -Erik

You know you have found the right wealth advisors when you do not have the fear of missing out because you are efficiently allocated to the highest expected returning investments that have proven, reliable, and persistent drivers of returns with robust diversification and minimization of taxes.

Don’t settle for anything less.