The Day Trader Myth
In a world where you cannot disprove something that doesn’t exist, I am setting out to do just that in this post. Many people over the years have been fed a lie backed by Wall Street and the discount brokerage industry that you can make a living out of day trading stocks. I believe this myth started around the time that trading stocks over the Internet became a thing. E-Trade was well-known for subtly making it look like trading stocks was so easy that a baby could do it. The advertising industry is a very clever one, and many other advertisements over the years have set out to show how easy, convenient, and realistic it is to make living off of day trading. If babies and monkeys can do it - so can you. Logic, however, would suggest otherwise.
Before we dive into what I define as day trading, let’s look at some examples of what could be confused with day trading to the novice investor: 1.) Dividend income. Don’t confuse a good dividend portfolio with day trading for a living. A solid dividend portfolio worth $1 million that generates 4% dividends per year equates to $40,000 of income. 2.) Likewise, a good real estate portfolio that generates income also generates positive cash flow that one can live off of. These are not trades; they are passive investments that generate real cash flow. The key is, you need to have serious capital in the first place to live off the income alone, and much of the day trading myth is targeted at simply growing a portfolio and generating income to live off of. 3.) There are, of course, professional advisors who “trade” everything from commodities to stock options (covered calls, married puts, etc.) for the purposes of generating portfolio income or hedging larger investments; however, the reality is that using your investment portfolio to day trade as a full-time occupation in order to generate income to live off of and support a family simply doesn’t exist.
I know I know, you see it on the news all the time… a kid generates $50,000 off of a trading strategy to pay for school. The stay-at-home mom pays off the mortgage with her portfolio proceeds. Father quits his day job because he mastered some day trading strategy he developed over time by reading Reddit. I’m not going to link stories to real people - you can google for yourself. Google how to become a day trader and knock yourself out. Do you know where else you see these stories? The casino. For each of these individuals that make a large sum of money, it is almost always beginner’s luck. Yes, I am generalizing because it’s the reality. Everyone was a winner in 2021 when speculation ran amuck and the market soared. How did that day trading gig work out in 2022 when retail investors got annihilated? And that’s what they don’t tell you in these stories - all of the countless people that have lost fortunes in the stock market doing dumb things. It’s completely irresponsible and reprehensible of the financial media. They want you to go to the broker firm and lose your shirt gambling. Then, when you give up, you’ll come to their sponsors and the like for financial advice to the point where you will overpay for questionable investment recommendations or some ridiculous gold/silver pitch. Much has been written over the years about how day traders massively underperform passive investors. You can read more about that here if you want.
Let’s do a little math and work backward. Retail investor Bob needs $1,000 per week to live off of and support his family. He has $50,000 that he has saved over the years, and he wants to quit his 9 to 5 so he can day trade for a living with that $50,000. How much money does he need to make to support his family? His portfolio needs to earn 2% each week so he can reach his income goal of $1,000. How does one build a portfolio that earns 2%, or close to it, per week? One does not. It simply cannot be done with any semblance of consistency. I’ll go ahead and say that it is impossible. Go back to what I referenced about day traders massively underperforming.
I am not going to argue that a good investor cannot make money day trading, but I will argue with certainty that day trading is not something you can successfully quit your day job for. Let’s say you are day trading and you get in a bad trade - a stock could drop down lower than expected. If you are an investor, you might look to add more as the price decreases and wait patiently for the stock to rebound while you collect dividends. As a day trader who is trying to feed his or her family, what do you do? You have to look for your next trade. You double down. You add more money to your account. You make another bet. Do you know what this sounds like? Gambling. Which is exactly what it is.
