I started trading stocks in January 2017 using Robin Hood. Over the next 3 months, I made 20% ROI and lost it all in a week. Then I gained 30% on 10 trades the following month. Over the next year, I lost and gained thousands of dollars, changed the entire asset allocation of my account, and was margin called.
I decided to call it quits on February 6, 2018 after the market dropped 5% a single day. A year after I started trading, I lost over $30,000. I made all the possible mistakes a trader could have made, but somehow I survived and learned a lot.
Lesson 1. Passive Indexing is the Best Path Forward
Historically speaking, the S&P 500 has returned 9% a year since 1980. By simply buying an ETF like Schwab S&P 500 Index Fund (SWPPX), you can replicate the performance of the S&P 500.
Despite staffs of analysts and access to insiders like CEOs and CFOs, the majority of hedge funds underperform the market each year. In fact, 80% of day traders lost money in their first year of trading.
Looking back, my strategy should have been simple: invest in index funds. It would have saved me a lot of time, effort, and grief.
Lesson 2. Transaction Costs Eat Away Your Money
Outperforming the S&P 500 is a difficult feat. When taxes, trading commissions, and other costs are factored in, outperforming the market is even MORE difficult.
(1) Capital gains taxes: You are taxed when you make money on your investments. If you hold your assets for longer than a year, you pay a reduced tax rate on your profits. If you sell within a year, your profits are taxed as ordinary income.
(2) Trade commissions: Some brokerage firms charge you a fixed fee every time you make a trade. Some sites like Robin Hood have no trade commissions or fees.
(3) Bid-ask spread: The ask price is always a little higher than the bid price. You will pay the ask price whenever you buy a stock. You will receive the bid price if you are selling the stock.
Lesson 3. The Odds are Always Against You
There is a lot of information out there that you do not have. Do not think for a second that you can outsmart the market. There is always someone that knows more than you.
YOU: Go to the mall, walk into a Lululemon store, and see a lot of people paying for yoga pants. This place is packed, and you think to yourself “this is awesome!” You talk to the sales clerk about how sales have been, and then quickly buy some shares of LULU on your phone.
HEDGE FUND: They know the founders and have regular calls with the CFO. Their staff calls stores across the country and pulls Nielsen data to determine if the numbers are really true. They then contact suppliers in China and realize that margins are being contracted despite strong sales growth. They sell the stock heading into its next earnings call.
Guess what happened to LULU after its earnings in 2015 despite positive news from analysts? Negative 16.41% the next day.
Lesson 4. You Need $1,000,000 to Make It Worthwhile
To trade for a living, you need a large bankroll. Why? It is not worth your time.
Let us assume that you make $30 an hour at your normal job and that you spend 2 hours a day doing research on the markets. Annualized, that is $21,600.
On a $100,000 portfolio, your returns will need to beat the market by 21.6% to make it worthwhile to you. If you have a $1,000,000 portfolio, this is a different story. You will only need to beat the market by 2.16%. Mind you, this does not include trading costs, research, and trading subscriptions which can total $5,000+ a year.
This also assumes that you never have a down month, let alone a down year. After running the numbers, active trading simply is not worth it.
Lesson 5. Taking Stock Tips is a Terrible Idea
Hot stock tips are everywhere. Unfortunately, it can be really hard to pass up a great buy tip. These tips are utter junk and will leave your portfolio bleeding red.
In reality, if somebody had a strategy that could consistently return 12% every year, they would be running their own billion dollar hedge fund and be rich beyond their wildest dreams. They would not need to sell stock picks.
S&P 500 historical returns are 9%. Endowments and pension funds would go crazy for any fund manager that could consistently beat the market by 3%.
Lesson 6. The Market is a Roller Coaster
Being profitable for 6 months is nice, but you can lose more than what you made when the market takes a dive. Sometimes the market is brutal and fast like an alligator. That was what happened on February 6, 2018: I lost 5% of my portfolio that day.
I ultimately decided to quit because the money simply was not worth the time and stress.
Lesson 7. Many “Day Traders” In Fact are Not Traders
Yachts, private jets, and fancy cars; sadly, this is not reality. 99% of stock service providers make more money from their ad revenue, subscriptions, and product sales than they do from actual trading.
The next time you see a trading service trying to sell you on a day trading education course, ask for their audited tax records of their returns. They will not have any.