They’re back! Matt Kranz ‘ USAToday column barks like an Army Recruiting Poster: “Online Brokerage Firms Want You!” Yes, here they go again! One of the best signs the markets is moving into a roaring bull market again is the fast growing popularity of day trading out there in Main Street America. Daytraders ride the tide up in bull markets, then hibernate during bear/recessions. Here’s how Kranz sees the trend as brokers rush in to feed the beast and get rich off traders who inevitably lose 77%-82%:
After years of hunkering down, clinging to cash and retrenching to survive the credit crunch themselves, online brokerages are rediscovering their competitive mojo. In a new wave of competition that’s likely a big positive for individual investors, online brokerages are looking for ways to not only lure customers wading back into the stock market but wrest existing investors from other firms. Charles Schwab fires the opening salvo to the latest post-bear-market showdown today when its commission price cuts go into effect. The firm stunned the online brokerage world this month by cutting the price of online trades 31 percent to $8.95 for all its individual-investor customers. … Whether Schwab’s move will trigger an all-out price war among online brokerages is an open question …
And over at the New York Times David Segal stirs the pot: “Day Traders 2.0: Wired, Angry and Loving It.” Yes, they’re jumping back in with the same confidence as before during the roaring dotcom trading era they lived (and died) on adrenaline and
“the Nasdaq seemed like a casino built by morons and a chimp with darts could pick winners. You would hear about these guys — nearly all of them were guys — and wonder: Could anyone make a living this way? And if the answer was yes, why were the rest of us suckers still holding down regular jobs?” Confidence? No, overconfidence … and that’s a big problem that day traders cannot see.”
In fact overconvidence is the main reason day traders cannot make a living. To be blunt, they’re gamblers destined to lose. Why? Read Jeff Sommer’s article in the NY Times : “How Men’s Overconfidence Hurts Them as Investors. Let’s cut to the chase: Sommers mentions the classic studies of Barber and Odean of the University of California: Their bottom line: “Overconfident investors are going to be interpreting what’s going on around them and feeling they are able make decisions that they’re really not equipped to make.”
We’ve been covering those two U.C. behavioral economists for over a decade. And the results of their research are clear and convincing. They studied 65,000 American investors and the entire market of investors in Taiwan, and the bottom line is simple: “The More You Trade, The Less You Earn.” Transaction costs, taxes and commissions eat up the profits of day traders. In the more recent Taiwan study the four behavioral finance professors had access to all the records of the Taiwan Stock Exchange (TSE) for the 1995-1999 period. Not just 66,400 randomly selected accounts in Wall Street’s huge database of millions of clients, but all 100 percent of the traders on TSE, including their identities, a total of 925,000 investors. That study confirms what we already know for American daytraders … that market timing and day-trading are game for losers.
The most active traders—a small group equaling about one percent of all traders—actually accounted for over half of all the exchange’s volume. While some traders did make money—after transaction costs were deducted they were net losers. The study actually went much deeper: Listen to this new bit of information about the strange self-sabotaging obsession traders have to lose money: The study separated the traders into six groups depending on their past successes. The researchers wanted to see if past winners repeated. The answer was yes, but at a very high cost:
– Overall, 82% of all the traders lost money, for an average loss of $45 a day.
– Out of 925,000 traders, about 750,000 lost roughly $11,250 each, but …
– The repeaters each made only a net $62,750 a year for all their efforts, time & risk-taking.
Yes, remember, “the more you trade, the less you earn.” Transaction costs, taxes and commissions eat up the profits of day traders. American daytraders beware: Market timing and day-trading are game for losers.