There are some event-driven fast trades still done by humans, like after news or responding to economic releases, but hedge funds have highly-educated people modeling the effects of an interest rate change or earnings release as their full-time job. This area is also becoming dominated by bots doing sentiment analysis.
I think the retail trader could have an edge in a few ways. One would be an illegal edge like inside information or market manipulation. Another would be finding illiquid stocks that proprietary traders and hedge funds won't bother with and trading using similar techniques. You could also look for extreme situations that model-based traders can't understand well due to lack of data, like a merger target breaking away. Those trades would be very risky though.
FWIW I'm a professional trader and never day trade my own account or pick individual stocks. My company allows it, but I don't believe I have any edge in doing so. I just buy and hold a portfolio of ETFs.
The problem is, such opportunities are rare.
But still, good move and your point stands. I took a position in ARM (my former employer) again half a year ago, too bad it was tiny!
Do you think that Wall Street hasn't figured that out?
Apple is one of the most watched stocks in the world. To the original commenters point: the banks have reams of 'technically astute' Analysts making those assessments, and much, much, more.
Wall Street has people all the way up and down Apple's value chain. They pay 'consultants' the world over to eek out any tiny bit of information WRT Apple's supply chain.
Again - I agree with the original commenter: individual traders are severely outgunned when it comes to these things and that's why they lose money.
Yes - theoretically, there are some very narrow areas where a savvy investor might be able to win, and surely, Wall St. has some gaping systematic problems ... but by enlarge, I agree with the sentiment of the analysis as well, even as other have pointed out flaws.
Investing is 90% gambling. The world only has so much GDP growth and there's not enough to go around to make every investor super happy. Most returns that an investor makes are someone else's loss. The losers are usually those with less information, or are lazy about it all (like some 'big dumb funds')
Yes, I think Wall St hasn't figured that out. Sentiment regresses to the mean, and so do analyst expectations.
If Wall St had figured out what the iPad meant there would have been a huge rush towards ARM.
That didn't happen. There's your answer.
It's also worth pointing there's a big difference between tactical short-term trading and strategic long-term trading.
Short-term trading is not a winning option for non-professionals.
Long-term trading can be, because - here's the obvious point - most traders are looking for quick returns.
Unspectacular stocks with robust longer term returns tend to be systematically undervalued - more so if they're in a specialised technical niche not many people understand.
Conversely stocks with a good historical record but signs of a less robust future tend to be overvalued.
There's a huge amount of fashion and trend-following on Wall St. People who research fundamentals in depth - like Warren Buffet - are very much the exception.
Actually ARM's stock went x10 in six years time. Having Apple as a key customer was no small part of that.
"Wall Street", whoever that is on Wall Street, may have figured it out, but the stock doesn't instantaneously move to the correct value afterwards. There is a time lag where traders who are paying attention can still get in at a good price.
Working on the pro side too, I also just hold ETFs mostly. No way an amateur day trader beats me at my job except by luck or finding trades too small for me to really care about.
Earnings reports though I've tried numerous things from subscribing to services that release numbers electrically to writing parsers based on prior reports. Earnings though you care about things like one time charges, gaap and non-gaap numbers, etc. They are one of the less consistent things to trade.
But for a retail trader, it probably can be summed as 'don't bother, you are strongly against all odds, proceed only if it is fun to do and don't expect to make any money and lose all'.
I would not go so far to say that simply buying companies of products you buy and understand is a viable trading strategy that will give you an edge for >100% returns. When the market is in a downturn this could be very different.
https://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc
You're making a logical error of assuming that because you made money, your actions caused it, that's not a valid assumption. It's a bull market, that doesn't mean you're a good stock picker.
Example: back in February crude prices crashed, and the weekly EIA reports were very bearish. But the bots bought the initial drop on report release and crude strongly rallied after each bearish report. Maybe that's the time to buy oil stocks :)
It seems far more unpredictable and lacking in reasoning than something like "Amazon's strategy for the next couple of years involves X, Y, and Z, so I think they will be successful/fail."
That's not really the right question. If Amazon's strategy is hugely successful, but everyone else already thought Amazon's strategy was going to be even more hugely successful and had priced that in, then you could be 100% correct about your question and lose money.
Yet, Amazon is about 100% more valuable stock wise in 2016 vs. 2014. The strategy is about the same.
The real question is: "How will stock X perform vs some baseline". I use a 90/10 VTI/BND portfolio as that baseline. If you have the time to understand how to answer that question, you can make a good return as an individual investor. (Either by identifying good investments, or reverting to the baseline)
For example, if as a tech person, you used your insights into the industry and ended up picked any one of Amazon, Apple, Red Hat, Oracle and/or Google as investments 10 years ago, as part of a diversified basket of 4-5 stocks, you would have beat a safe Boglehead portfolio by a significant margin, even factoring in the market implosion in 2008/9. If you picked Apple or Amazon, you hit a home run.
It depends on your needs though. If you're saving for college and your kid is 16, you need a portfolio with a lower volatility. If you're retired and need income, you want to minimize volatility and minimize tax impact. If you're a mid-career professional like me who won't need a dime until 2030, you can take more risks.
Well, sure you did. If you picked Yahoo in the late 90s, a home run hit you. If you picked Intel or Microsoft in the recent past, nothing happened to you.
A good article on using insights as a tech person is Phil G's piece on shorting Microsoft in the 80s. (Microsoft was much less appealing to a tech person in the 80s than it is now, and a much better investment.) http://philip.greenspun.com/materialism/money
This is not to say that tech people can't make money banking on their instincts, just that I personally am not tremendously confident about my own instincts. I can certainly make a very compellingly sounding bull or bear case regarding any currently famous tech company.
A great example from recent history is LinkedIn's stock tanking hugely in one day and then Microsoft bringing it back to the original level in one day some time later. And I'll be damned if Microsoft ever makes that money back. But I totally should have bought the dip.
To abuse the baseball analogy, even exceptional hitters don't get on base > 60% of the time. If you picked Red Hat or Oracle, you didn't hit a home run, but you still beat the VTI.
That's why you diversify. One safe way to do it is to buy the market. Another way is to buy a basket of diverse stocks. That basket is a higher risk but also has a higher potential of reward.
It seems like we're agreed that investing should not be done by reasoning like "Amazon's strategy for the next couple of years involves X, Y, and Z, so I think they will be successful/fail."
> For example, if as a tech person, you used your insights into the industry [...]
... then I would be radically under-diversified. If tech is doing well, my biggest asset (my career) is performing well. I'm most likely to need to draw on my stocks in an emergency precisely when they'll be doing poorest.
Value trades rely a bit less on others' expectations. If you were to buy a company trading at 12x earnings with the expectation that earnings would grow 15% per year over the next five years, then it's pretty likely that if your expectations come to fruition then you'll make money on the trade.
It's also easy to make a net return when the market is up. The trick is not losing your shirt when the market tanks.
Why are taxes on short term gains never considered?
Commissions, taxes, and being a small player means you don't get the best price, all make for quite a hill needed to climb just to break even.
The paper for this would be the famous barber/odean's "boys will be boys" [1]
[1] https://faculty.haas.berkeley.edu/odean/papers/gender/BoysWi...
For example, I went into oil stocks earlier this year, and I knew that the market was panicking over the low oil price. So some days the market would bounce back right when the oil pits close at 2:30 (since the oil correlation can't get much worse then). Take a chance to ride the way back up, why not? But you can't do this all the time, which is why I gave you this esoteric example.
Well, if you still want a percentage, I'd say 10-20% might be a reasonable achievement.
Don't forget taxes!
A better way would have been to compare performance versus frequency of trading (I don't expect this to prove one way or another though). The fact is, there are many strategies one could take, and it's how well you execute them that counts.
Personally, I don't find daytrading riskier than holding stocks. By far my biggest losses come from holding the wrong stocks for a long period. It just seems riskier because you have to confront yourself with the possibility of loss each day, rather than hold "long term" and deny that you are wrong.
I now take the Doyle Brunson approach. The poker champion loved to pick up small pots and felt it was critical to do by aggressively playing small hands. That way, these little wins pay for the risk of playing bigger hands over time. I've had the same experience - my daytrading tends to be small money but it stems from work done for holding long term stocks. So why not put it to use?
But, to actually make good money daytrading is still really difficult. Commissions alone can make you have to be 55/45 correct, but there is also the steamroller affect where people tend to hold on to losses and double down further. So it's also about mastering yourself in addition to your market. Otherwise, there is not reason why you can't be better: you are putting in more work than others to make good decisions, and that's how you profit. Trouble is, when are you still outgunned informationally?