The popularity of day trading has soared since the outbreak of the pandemic.
We haven’t seen an interest in day trading comparable to this since the dot-com boom.
It is common knowledge how that ended…
It wasn’t good.
Millennials, who weren’t around for the last day trading boom and bust, are leading the resurgence.
They have jumped onto low-cost trading platforms like Robinhood (without any training or professional guidance) and are incredibly active in the market.
They are driving trading volumes to all-time highs.
For January 2021, the average daily trading volume of equities was up almost 35% from January 2020 and up more than 100% from January 2019.
I wish this new generation of day traders luck in growing their wealth, but I am not optimistic about their chances of success.
The historical data tied to day trading is overwhelming against them.
Study after study shows that over any meaningful period of time, nonprofessional day traders perform incredibly poorly.
Perhaps the largest study done was on Taiwanese day traders in 2011.
That study covered the 15-year period from 1992 through 2006.
Of the 360,000 Taiwanese day traders who were typically active each year, fewer than 1% were able to earn positive abnormal returns net of fees.
Fewer than 1%… I don’t like those odds.
Another Taiwanese study looked at 130,000 day traders active from 1995 to 1999.
That study found that in a typical six-month period, 82% of those day traders lost money.
And they were losing money during a bull market!
In 2019, a study of 1,600 day traders in Brazil was published.
Different country, same results…
Over the one-year period that these day traders were tracked, the study found that only 3% of them actually made money. Only 1.1% earned more than the Brazilian minimum wage.
And, of course, 97% of them were out of pocket for their year of day trading efforts.
Activity Is the Enemy of Stock Market Success
In the United States, the results are no different.
Unguided day trading just doesn’t work.
A 2000 study at the University of California, Berkeley, examined 66,000 trading accounts at Charles Schwab from 1991 to 1996.
The study found that trading volume is the enemy of investment performance.
While the overall market had an annual return of 17.9%, the most actively traded Charles Schwab accounts earned an annual return of only 11.4%.
That means the more active traders underperformed the market by a massive 6.5%.
By doing more, they earned less.
The authors of the study attributed the high levels of trading and poor performance to overconfidence. “Our central message is that trading is hazardous to your wealth,” they wrote. “Those who trade the most are hurt the most.”
The really unfortunate thing for these day traders is that stock market investing really isn’t all that hard.
Warren Buffett’s partner Charlie Munger was once asked how he and Buffett had been able to build such an incredible long-term track record.
Munger’s answer was simple: that he and Buffett weren’t in a hurry to get rich.
The stock market is rigged in our favor. You just need to take your time and let it work for you.
While it goes up and down in the short term, over the very long term, the market goes up consistently at a rate of roughly 10% per year.
That is more than enough to make you rich if you give it enough time.