Researchers comparing the performance of institutional portfolio managers with average retail investors conclude that three factors make it not only unlikely but virtually impossible for individual investors to match the performance of a professional … First, the pros live and breath trading 24/7. Second, they have too many analytical, data, tax, timing and regulatory tricks that give them a clear competitive advantage over the average passive investor. And third, the individual investor’s brain is simply not wired in a way to consistently make winning investment decisions against full-time professional managers. In short, Main Street investors are playing with a enormous handicap against an undefeated enemy that controls the battlefield. Yes, this may be irrational, but they can’t hear the warnings. Gamblers talk about winning, but deep inside there’s a saboteur, a loser.
The idea of day-trading triggers an instant and automatic flashback to that classic 1974 movie, “The Gambler.” James Caan, plays a brilliant college professor, the ultimate symbol of the “rational man.” Unfortunately, he’s trapped in his addiction to gambling. He’s in hock forty-five grand. Time and again he gets close to paying off his marker. Then he’ll sabotage himself—again. He’ll take a big risk, lay it all back on the line, one more time. To make the big killing. Can’t stop himself. Like all addicts, his disease controls his brain, blinding him to the consequences. Addicts are irrational.
Now he’s drowning in markers. The sharks want him to pay up. He ain’t got it. Keeps betting. Gets deeper in debt. Killers are after his brilliant head. In one tense scene, with the goons closing in, an anxious professor begs his bookie for another loan, to place one more big bet. To bail him out. “Ya know how all gambling addicts are alike?” says the bookie, sitting in his fancy new sports car, looking at the begging gambler: “They all wanna lose!”
The grand delusions of the macho trader
Same with trading stocks. Tell me: Is there really any difference today being an addict and a loser just because the bookie is an online discount broker, mutual funds or some credit card companies all hounding you for your investment dollars, maybe even promising you “free” trades and high returns? The truth is obvious: Wall Street brokers are no different than Vegas—they’re all bookies. Unfortunately, real addicts can’t or won’t hear the warnings: “There’s no such thing as a free lunch.” There’s a “sucker born every minute.”
They’re deaf and blind. They fail to see or just plain ignore all the hidden costs, the time wasted, research costs, margin requirements, lost interest, the stress of chasing good money with bad, and all the mistakes and losses. The addict is blind, can’t see all that. Why? They’re fighting an inner psychological battle, between proving they’re a hero and a winner in a cold, hard, cruel world, while fighting an inner voice that tells them they’re a loser. The rages on—and it’s all in their brains. They’re trapped in the illusion that they can outwit the market, win at the casino, make a killing. This obsession is an old game that keeps putting commissions in brokers’ pockets.
Nothing’s changed since I was publishing my investment newsletter a couple decades ago. To the man, brokers I talked to agreed that on average investor/addicts lasted one-to-two years before the brokers got all their risk capital in fees and commissions. Were the brokers worried? No, there was always a new crop of suckers to take their places. Fortunately, most of the investors wised up eventually—like addicts going through recovery programs. They‘d get out, poorer but wiser, and without the goons threatening to break their legs, or worse.
Still think you got what it takes to be a winning trader?
Do you have the “killer instinct” it takes to be one of those rare traders who makes more than the average of $50,000 a year? The vast majority don’t, and most that do, still lose (remember Wall Street controls the casino’s odds). Here’s a great example. Listen to this Main Street investor who was certain he had the mojo to beat the casino, tried to do it, and finally figured stopped listening to the promises of Wall Street and became a passive investor, and gave up trying to be a hot-shot day-trader. But like the child who just won’t believe his mom when she says don’t touch that iron—he had to try it himself first, and learn the hard way some costly lessons, all by himself.
Listen closely, his story says a lot about the investor’s strange addiction. Today Jack is an information technology manager working in government. A college grad, he’s married with four children, one in college and three in high school with college coming up next. He’s a member of AARP and looking to retire in the near future, even with four kids in college and grad school. Here’s Jack vivid story as he details how even the winners are losers:
“I was day trading for a two-year period back in 2002-2004 when the market slowly moved into recovery after a thirty-month recession. During that period I averaged about a $5,000 a month profit, on an average 24 trades.” Like many traders, he kept detailed trading records, and still has them, as a reminder. “Sounds pretty good, right, so why did I stop? Well, here’s why:”
1. Hidden costs: “That $5,000 was before taxes. And there were no benefits, no vacation, etc.” Going in, most new traders fail to consider all the hidden costs. “Today my job pays about 50% more a month, not counting benefits and perks. Plus, I averaged 24 trades a month at $10 each. That means about 5% of my profit was nicked by my broker.”
2. Playing by their rules. “Tighter restrictions on float of capital, requiring three business day clearing of trades meant I had to adjust to deploying my capital in ‘thirds’ in order to maintain trading funds each day. Sure I could use margin, but that’s both risky and costly. In short, I was undercapitalized.”
3. Relentless Anxiety. This is the big secret no broker will tell you about up front—the killer anxiety takes a big toll on family life and physical health: It’s relentless, day and night, especially if you’re tying to support a family of six: “Unbelievable stress! The impact of a losing day (and there were plenty) was hard to deal with. Over two years I got better at removing emotion from the equation, but it was still very intense. You literally have to be on your game all the time. I wouldn’t even go to the bathroom with a trade ‘on the table’ for fear of missing the move I was waiting for.” Sounds like a living hell.
4. Being a “good” trader is never enough. “All this, and still I was a good trader. Imagine what it’s like for someone who’s lousy at it!” And most naïve investors are lousy at it. “I only failed to make money in two of the months I traded, I even did well in 2002 a horrible year for stocks.”
5. Cheap trades, a pusher’s come-on. Many of today’s cheap trades hucksters are like drug dealers. They know they’ll recover their “investment” later, so they suck in naïve investors with freebies (“25 free trades the first month!”), you’re hooked, then they can skim off profits later. That’s how addicts become losers. Jack warns: “Very few people are going to come to trade with the “holy trinity” of resources necessary to succeed against Street professionals: Capital, Skill, and Temperament. I just reached the point where the relentless pressure to succeed, every single day, was more stress than I could deal with.”
6. The “lazy” solution. “Now here’s the best part of the story. Since then I found a job in the IT field, I’ve moved all my funds into one of those “Lazy’ Portfolios” you write about, and I’ve done very nicely. I am happier, way more relaxed, and I am richer. In the end, that decision turned out to be the ‘best trade’ I ever made.”
7. Retirement planning bonus. And if you really want to fine-tune your retirement plans, Jack added this little bit of advice: “I also use Boston University Professor Larry Kotlikoff’s consumption smoothing software, ESPlanner, for financial planning. It’s a common sense ‘paradigm shifter’ that should be an integral part of every personal toolkit. It allowed me to confirm what I suspected (that we were actually saving too much for retirement) and also to model a better way to draw down our assets.”
8. Bottom line. Jack’s proof that there really is an easier, softer way. Work at a low-stress business or job doing something you love—and forget chasing “cheap” trades and timing the market. You’ll reduce your anxiety, won’t have to be a hero, avoid addiction to timing the market, and no goons (those “voices” in your head!) will be breathing down your neck.
Jack’s bottom line is so simple, promising and exciting: “Now we will be able to retire in five years and a combination of 401K’s and IRA’s and cash accounts (all invested in ‘Lazy Portfolios’), plus Social Security and a guaranteed pension … and we’ll never have to work again!” You heard him, he’ll never have to work again—without betting at the Wall Street casino—and he did it while putting four kids through college! So before you get lured into the trading addiction, remember that brilliant professor in “The Gambler.” His bookie knows all addicts are secretly self-destructive losers, unable to stop. So bookies don’t have to say anything, no warnings because they know the addict won’t hear them anyway, they’re deaf, blind, in denial. Why are they in denial? Remember this: Because addicts are obsessed with a need to disprove they’re losers—that’s the big secret hidden deep in their souls, hidden even from themselves.