Hype versus reality, trading versus investing
I was in a rut. No money, dead-end job, debt piling. I was Lamborghini dreams going nowhere fast until the day it turned around. Last Tuesday. I watched a YouTube vid about trading and it changed my life forever …
I now own two Alpine villas and a modest island in French Polynesia. I have helicopters three, and shelves of rich mahogany. I owe it all to trading and you can too.
It’s a captivating story, this. Seductive. The way trading is often presented, certainly on social media, makes it seem like the no-brainer way fast-track it to the big time, or at least the rich time. Problem is – it’s just not reality.
For clarity’s sake, trading is the buying and selling of securities (think stocks, bonds, currencies and commodities) over short time periods. While investing is more of the buy-it-and-hold-it long game, trading transactions open and close within weeks or days, or even hours, minutes or seconds (AKA day trading).
Hype meets stats
The number of everyday people trading has shot up in recent times. Lockdown boredom, remote working, DIY platforms, buoyant markets (pre 2022), and the rise of cryptocurrencies all played a part.
The bar has never been lower but, of course, you need to be in it to win it. Enter social media influencers peddling classes, courses, secrets and tips so us ordinary folks can live the MTV Cribs life too
Unfortunately, though, the stark truth is that almost all traders lose money. The 1-3% who consistently do earn above-market returns (yes just 1-3%) tend to be the experienced, sophisticated traders.
And please note that “above-market returns” doesn’t mean millions, thousands or even hundreds. It just means exiting with a profit, however big or small, after fees and taxes.
Seesaws and rollercoasters
For every trader high in the clouds, countless others sit at the bottom of the same seesaw.
Perhaps most unfortunately, research shows that certain groups are particularly likely to get sucked into trading hype; namely people in challenging socioeconomic situations, unmarried young men, and men from minority backgrounds.
Part of the problem, maybe a lot of the problem, is that trading is consistently presented as a game of wits and nerves. The only ticket required to ride the rollercoaster, they say, is an iron stomach …
But here’s truth: some 80% of traders quit within the first two years, and just 7% remain active after five years. Less than 1% overall will make a solid living from it because success isn’t about nerve … it’s about perseverance and learning from mistakes. It’s about experience, knowledge, a finely-tuned strategy and a dash of plain old luck.
Retail investors will ‘always lose money’
A commonly used term for non-professional investors is retail investors, not necessarily traders but people who DIY purchase assets such as stocks, bonds, securities, mutual funds, and exchange traded funds.
In an article entitled Retail investors are amateurs in a high-stakes market: they cannot win, Oxford University Finance Associate, Professor Bige Kahraman, says it is “gambling as a form of investment.”
“People get misconceptions that they know something and can beat the index (but) retail investors will always lose money … ”
Plenty more data points towards the discrepancy between what trading promises to be, and what it is. Those who do manage to carve success in the game represent less than 1%, and invariably these are the professionals with education, information, tech and experience on their side.
A ride on the teecups?
The rollercoaster-version of trading presents a high-nerve, thrill-a-minute ride full of peaks and dips, and that the rewards will come to those with nerves of steal. Reward and risk are bedfellows, no?
But there’s another version of that metaphor where 100 people get on the rollercoaster … yet the sole survivor is the one who has studied the ride. Who knows when to bend, when to brace, when to duck, and when to hop off.
All this talk of sole survivors, though. It’s a bit dramatic. Trading is just a (high risk) way to grow your money. It’s investing. And investing when carried out to time-tested principles isn’t a rollercoaster at all. It’s actually quite boring. It’s the teacups.
It doesn’t make for a compelling Instagram story, but there’s risk and there’s risk. There are rollercoasters and there are teacups: gentler, consistent, steady and much less likely to break down.
Alton Towers anyone?