May the odds be ever in your favor
The house is designed to win
Retail investing has become all the rage as bored/stressed/naive people are trying their hand at investing from the comfort of their couch. Bank of America Corp. reported a 13% jump in new accounts in Q2 and the Robinhood trading app boasted a Q1 surge of 3 million new accounts. Huh? Aren’t we in the midst of a global pandemic?
It’s hard to ignore the presumed intent behind the majority of these new account sign ups: to get rich quick. While this urge is forgivably human, it’s also “guaranteed slaughter” for the overwhelming majority of day traders. According to Princeton professor, Burt Malkiel, “It turned out that less than 1% of day traders were able to beat the market returns available from a low-cost ETF” and he elaborates further by citing a Brazailian study in which “only 3% of day traders made money, and less than 1% made more than the Brazilian minimum wage.” Yowzer! That certainly puts day trading into perspective.
Separate logic and emotion
Investing is riddled with bias, and triggers emotional responses whether we believe it or not. It can activate the same strong emotional pull that gambling does, especially when we’re bored and the money traded on an app like Robinhood doesn’t feel real. To the surprise of no one, consumers spend more when they’re paying with credit cards/digital money, than with ‘traditional’ cash. The “retail trading renaissance” we’re witnessing lies at the intersection of overconfidence in amateur knowledge, lack of self control and a disregard of prudent advice. Logic tells us to examine the numbers, but emotion convinces us that we’ve got clever ‘strategies’ to outsmart the system. Ha! Riiiight.
While everyday people are certainly capable of making their own investment decisions, Warren Buffet puts it best: “what you need is the temperament to control the urges that get other people in trouble investing.” Self control is a key factor in successful trading because most gains are made in the long term. “Time is your friend. Impulse is your enemy,” according to American investor, John Bogle, and he’s spot on.
Mitigating our worst impulses is imperative for a successful trading career — amateur or professional — and for many new retail investors, that means shifting into the equity crowdfunding arena. Like Wall Street, it’s Federally regulated and investors receive a slice of ownership, but it’s much less volatile, has a profoundly positive social impact for communities and has the possibility of much greater upside potential long-term. Equity crowdfunding is the alternative that fresh investors, with no previous access to Wall Street, may want to consider before investing their hard earned money, or coronavirus stimulus checks, into day trading on platforms like Robinhood.
If you’re curious to learn more about investing via equity crowdfunding, check out TruCrowd’s online investment portal