Day traders have terrible success.
Academics studying stock pickers have long observed that the vast majority of professional money managers – about 85% – lag behind their benchmarks over a period of several years.
Now these professionals are turning to the day traders warning that the same bad results apply to them too.
"I don't confuse day traders with serious investors," wrote Princeton Professor Burton Malkiel, author of "A Random Walk Down Wall Street," on a blog for Wealthfront, where he is chief investment officer. "Serious investing involves broad diversification, realignment, active tax management, avoidance of market timing, price keeping and the use of investment vehicles such as ETFs with minimal fees. Do not be misled by false claims about easy gains from day trading."
Backing Malkiel is a large number of academic studies dating back 20 years showing that day traders and other very active traders have difficulty making money over more than short periods of time.
The most recent study, "Attention-Induced Trading and Returns: Evidence from Robinhood Users," was published in October and examined Robinhood's trading activity from May 2, 2018 to August 13, 2020. They specifically examined "Extreme Herding Events". where Robinhood traders pushed into certain stocks.
They concluded that during these extreme "herding events" "the top 0.5% of Robinhood's daily stock purchases averaged about 5% returns over the next month, while the more extreme herding events have reversals of about 9%".
The conclusion: "Large increases in Robinhood users often go hand in hand with large price peaks and are followed by reliably negative returns."
Why is that happend? The authors found that most Robinhood investors are inexperienced and therefore more likely to chase performance. The app's layout, which draws attention to the most active stocks, also causes traders to buy stocks "more aggressively than other retail investors".
Lastly, the site's ease of use and the fact that it is commission-free can also boost commerce. "As evidenced by the many times higher turnover rates than other brokerage firms, Robinhood users are more speculative and less frequent for reasons such as investing their retirement savings, liquidity requirements, selling tax losses and compensating." "
When Robinhood traders pile up so quickly, why do stocks that go up fall? In addition to the inverse of the mean, the authors suggest that short sellers are well aware of Robinhood's trading patterns. "These reversals appear to be well known as stocks drifting Robinhood users into received significant brief interest," they wrote.
A Robinhood spokesperson declined to comment on the study, but said in a statement emailed to CNBC: "(W) We are seeing evidence that most of our customers buy and hold, and 98% of ours Customers are not sample dealers. "
However, other studies of day traders have come to similar results.
A study published in June of nearly 1,600 Brazilian day traders who tracked their activities for a year concluded that only 3% made money. Avoiding claims that day traders can make money over short periods of time (a day or week), the authors focused on day trading activities over long periods of time.
Their conclusion: "We show that it is practically impossible for individuals to make a living from daily trading, contrary to the claims of the course providers. We observe all persons who between 2013 and 2015 with daily trading on the Brazilian stock futures Market started third in volume in the world. We find that 97% of all individuals who have existed for more than 300 days have lost money. Only 1.1% earned more than the Brazilian minimum wage and only 0, 5% earned more than a bank employee's starting salary – all at great risk. "
A 2011 study of Taiwanese day traders over a 15-year period from 1992 to 2006 showed only marginally better results. Day trading is popular in Taiwan. According to the authors, about 360,000 Taiwanese people conduct day-to-day business in an average year.
Their conclusion: "Consistent with previous work on individual investor performance, the vast majority of day traders are losing money." They find that a small group (around 15%) has higher returns after fees, but that "some outperformance is expected through sheer luck".
A later version of the 2013 paper concluded, "Less than 1% of the day trader population is capable of predictably and reliably generating positive abnormal returns, net of fees."
What about the tiny group that could do better than sheer luck? The authors speculate that "one way day traders could make profits is by providing liquidity through passive limit orders to uninformed investors who are too eager to pay for quick execution."
In other words, the tiny fraction of day traders who actually make money in Taiwan trade "stupid money" – other day traders and general investors.
An older study from 2000 did not do better for day traders. Brad M. Barber and Terrance Odean of the University of California, Berkeley, analyzed 66,000 trading accounts at Charles Schwab from 1991 to 1996. They found that those who traded the most had an 11.4% annual return while the market returned 17.9% overall. .
Given this evidence, why does day trading persist and why is it so popular? The authors concluded that very active traders seem to think they know more than they really know. "Excessive trust can explain the high level of trading and the resulting poor performance of individual investors," the authors say.
Their conclusion corresponds to that of the other studies. "Our central message is that trading threatens your wealth. … Those who trade the most are hurt the most."
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