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Day trading is too much fun to be profitable

People like having fun

I am not immune from the gambling instinct. Many years ago I opened a spreadbetting account and had a go at day trading.

I was thrilled when the blinking lights of the trading platform flashed green, and less so when they turned red – though losing money only doubled my resolve!

And there, in a nutshell, is the gambler’s curse.

Losing money makes you want to go back for more. Las Vegas wasn’t built on the triumphs of its punters, but on the takings of the house. And in the long run, the house nearly always wins.

I learned quickly that day trading was dangerous, and never wavered from my main strategy of methodically investing in passive funds and shares.

My interest in investing is intellectually stimulating, and there are certainly some sunny old days when strong company results come in.

But a laugh a minute it is not.

Day trading for fun and profit

When people discover my interest in investing, they usually respond in one of three ways.

  • The most common is complete disinterest, if not mild disdain.
  • They may tell me they’ve got some shares in ARM / Google / BP / RBS and they’re a few hundred quid in profit. What should they buy next?
  • Or thirdly, they might tell me they once had shares in ARM / Google / BP / RBS, and they lost half their money. Shares are a mug’s game!

I can’t recall anyone gleefully telling me they invested in passive index funds. A few when pushed have admitted they “have some sort of ISA in shares”.

Even when it comes to stock picking, it’s once a year that I meet a stranger who reveals they own a portfolio of carefully selected long-term holdings.

No, for the public, being in shares means punting on prices going up and down.

And while that might be expensive fun (though I suspect filling your hot tub with Cristal and scantily clad Eastern Europeans delivers more bangs for the buck) it’s no way to make money.

Making money can be challenging and stimulating. Rewarding, even.

But the selling point is never that it’s easy or fun.

Get rich slowly? Boring!

Of course we’ve all heard entrepreneurs tell us to “follow our passion” to make our money. When running a business feels like fun, you’re already a winner.

I’m sure that’s true, but even if you’re having fun, you’re still not having it easy.

You might smile as you wake at 6am for another 12-hour day with no promise of a pay cheque, but I guarantee you’ll be doing more than clicking a few buttons for your reward.

What about investing in a tracker fund, or buying your own home? Most people make money through home ownership, after all. And it’s not exactly an arduous ordeal – you get to sleep in your investment every night. No sweat!

But the tricky bit with passive investing or buying a home is the long-term commitment. You’re hunkering down for 20-30 years of sticking to a plan.

There’s also the small matter that you have to earn the money to fund these investments with a job, and that is unlikely to be a rip-roaring affair. The returns from residential property or from a typical run in the stock market will not make you rich unless you put a fair amount of money in first.

Who wouldn’t rather put £1,000 into a day trading account, and duck and dive their way to riches?

Who wouldn’t prefer to have a view, push a button, and “take a position”, as the advert says, rather than pushing crates or taking it from the boss?

Yep, you, me and the rest of us. And when everyone wants to do something that is effortlessly easy to do, then you can be pretty sure that all the profits were long since wrung away.

The horrible business of getting rich

I was discussing all this with a friend who told me she’d invested in a wine fund because it was “more fun” than the tracker fund I’d suggested.

If the wine didn’t go up in value, she could drink it!

True, but another failure of the fun test. Too much fun – so it’s less likely to make her real money.

To give yourself the best shot of making a fortune, you need to do something that nobody else wants to do – and where you’ve also found a way to make an outsized profit. (Few people want to be dustbin men, but that won’t make you rich. Owning a toxic waste dump might).

Here are a few examples.

You could start your own business

Long hours, uncertain rewards, a massive chance of failure, and an almost inconceivable list of things nobody ever tells you about that you’ll have to do every day. Most people cannot be entrepreneurs, let alone successful ones, which is why the few who succeed can make a fortune.

Create you own property empire somewhere skuzzy

Head to a grimy part of Manchester or Birmingham, start buying run down properties, refurbish them with sweat equity, hire some heavies to get your rent collected, and wait 30 years for gentrification to finally roll up at your front doors. High chance of success. Strong chance of having a terrible time.

Invest in unlisted start-ups in boring sectors

The returns from investing in successful private companies dwarf those you’ll make from the stock market. No surprise – it’s much harder to find good ones, they’re very illiquid and even harder to get out of than to get into, and a great many fail. Also the best opportunities will be doing something dull and unsexy, so you won’t want to brag.

It’s worth comparing backing boring unlisted firms with being an angel investor in theatre or films.

Who wouldn’t want to be the patron of a troop of bright young things? To be flattered as you’re asked about a new creative concept, and to go to the opening night to be gushed over by your family and friends?

Too much fun, very little effort – and an extremely high chance of losing all the money you put into it.

Do you feel lucky, punk?

Someone somewhere will back the next Cats or Evita this year. Someone will buy a vintage wine or find the next Damien Hirst at a college art exhibition. Someone will pick up shares in a future Amazon-slayer on the day of its IPO.

Being lucky is the easiest way to get rich (though I suspect it’s actually not the most fun – but that’s an existential conversation for another day).

If you want lottery odds on making your fortune, there’s an easy solution – buy a lottery ticket. For every one person who stares in disbelief as their numbers come up and they make a million, another 20 million crumple and toss their tickets in disgust.

Not exactly great fun, but not too much effort, either. And at £1 a week it’s a hell of a lot cheaper than day trading.

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{ 16 comments… add one }
  • 1 Janice April 26, 2013, 11:40 am

    I used to invest like a gambler by watching the currency markets. And my revelation was, investing isn’t a speculative game, it’s much more in depth and refined. From then on, I’ve decided that I’d prefer a less fun, more effort approach.

  • 2 Robert Harrison April 26, 2013, 12:00 pm

    As I’m reading this article those “clever” advertising algorithms have plonked an advert for IG Index spreadbetting in the top-right corner of the web page. 🙂

    Bob

  • 3 benfitzg April 26, 2013, 12:13 pm

    “Who wouldn’t prefer to have a view, push a button, and “take a position”, as the advert says, rather than pushing crates or taking it from the boss?”

    Someone who wants to contribute to society by creating wealth in a meaningful way! If everyone simply tries to skim off the labour of others we have no wealth. Yet at the other end of the scale, if everyone did wealth creating work and nobody did day trading the world would be completely fine.

  • 4 The Investor April 26, 2013, 12:31 pm

    @benfitzg — You could always contribute in your spare time? I think many of us would struggle to say our daily activities contribute to society. An awful lot of it seems to involve shifting plastic from Chinese factories to landfill, and turning a few coppers along the way.

  • 5 benfitzg April 26, 2013, 1:12 pm

    Investor, no, but I try not to skim. Sitting on my arse might have an opportunity cost but it’s not taking from another muppet trying to avoid hard work by creaming off prole wealth generation.

    I’m not anti stock markets, but day trading to me seems pure speculation. It’s not “providing liquidity”, it’s not enabling companies to invest, it’s just using our existing structures to grab a piece of the action without contributing.

    Also I wouldn’t trust web based brokers as far as I could throw them!

  • 6 gadgetmind April 26, 2013, 3:15 pm

    If anyone does fancy a pop at spreadbetting I can heartily recommend IG Group. As my wife is a shareholder, we stand far more chance of making money than you do, but please go ahead and good luck!

  • 7 Thisisnot Living April 26, 2013, 3:41 pm

    Thank you for this wonderfully uplifting article… Time for me to go find a toxic waste dump to throw myself into.
    Interestingly, this shines some light on how the institutions that packaged those toxic house loans made so much mulah. One man’s rubbish is a blind man’s gold. Maybe I could repackage toxic waste as a food item.. I’d call it something indecipherable like hydrogenated fat.

  • 8 OldPro April 26, 2013, 5:05 pm

    Indeed “Thisisnot Living”… dark prose from The Investor today… Though all a useful slap in the face or antidote to excessive optimism (or as I term it “stupidity”)

    Also why the Monevator website will never be Big in America. You’d be hung for treason!

  • 9 ermine April 26, 2013, 7:38 pm

    Though I agree with the general sentiments, and have battle-tested some of them to my satisfaction, spreadbetting is not inherently equal to day trading.

    It allows you to go short which is sometimes valuable, f’rinstance where you would incur a CGT hit on selling you can short your holding instead. And I’ve shorted Sharesave at times too.

    There’s nothing inherently about an IG Index account that says you MUST trade 😉 Mine stays inactive most of the time, but sometimes it performs a service that only spreadbetting seems to be able to do…

  • 10 The Investor April 26, 2013, 7:44 pm

    @ermine — Oh, I agree. I linked in the article to a useful article about spreadbetting for tax reasons, and I’ve kept my account for occasional shorts and hedges.

    But if you are going to daytrade, spreadbetting is by far the best way in this country, so that was my weapon of choice back when I gave it a bash.

  • 11 gadgetmind April 26, 2013, 8:01 pm

    @ermine – wow, does your employer’s share policy really allow employees to take short positions? Mine doesn’t, and neither are we allowed to take short-term positions in our own shares nor any position in those of (named) competitors or customers without written permission.

  • 12 SG April 26, 2013, 8:27 pm

    Please, please, everyone use IG for spreadbetting. I, too, have shares in them.

  • 13 The Shoestring Investor April 26, 2013, 9:31 pm

    An interesting, if slightly disheartening, article. It makes an excellent point though, that too many people think the only way to success is that they have to absolutely love what they do that they doubtless miss plenty of good, but boring, opportunities to make some money!

  • 14 ermine April 27, 2013, 6:27 am

    @gadgetmind I was an engineer, not in the finance industry, which may throw a different light on things. Someone else raised this a while ago and I searched the Ts and Cs of Sharesave (and SIP) and was unable to find any prohibition on this, until you reached Board level (who had a Sharesave and SIP scheme called something else, though these seemed to have the same contribution limits looking at director sales on RNS).

    The closest I found was a restriction on trading shares if you had price-sensitive advance information. I wasn’t at that level.

  • 15 gadgetmind April 27, 2013, 3:16 pm

    @ermine – We’re also engineers. Our SAYE is covered by exactly the same employee share dealing policy as everything else, but these policies do vary greatly from company to company.

  • 16 tw April 27, 2013, 3:22 pm

    There is an inverse correlation between having fun and making money day trading.

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