I am the proud holder of an MBA in Finance from Baruch College’s Zicklin School of Business. I pursued this subject matter because like many red-blooded, type A+ personality, aggressive achievers; I wanted to get rich playing the Financial Markets.
After a few prep courses in Eco and Finance, I registered for my first hard-core Financial Markets class. Our first assignment, Burton Malkiel book, “A Random Walk Down Wall Street.” Hell of a page turner, with one drawback; the realization that I’d never get rich playing the Financial Markets. Not to say that this is not possible, we’ll get to that soon, just saying that trading success comes only to Market Makers, not the average Day Trader going in and out of the Markets short-term. In fact, according to Mr. Malkiel, you have virtually no chance to net a profit as the “little guy.”
It’s like this: there’s weather and there’s climate. Weather is an almost random set of circumstances that result in rain one day, sunshine the next day and a mix of sun and clouds on day three. Climate is weather in a broader context, an average of random weather events like those noted above over time. It’s cold in the Winter, rainy in the Spring, hot in the Summer and cool in the Fall. Financial Markets is like Climate, a moving average of security prices over time. What we can predict is the direction of, say, the Stock Market over time because the Capital Asset Pricing Model says that investors expect a return on a marketable security that commensurate with the price risk inherent that security. In layman’s terms, over time, stock A, which varies in price more than the Market as a whole is riskier than stock B, which varies in price less than the Market. Over time, stock A will reward investors a higher return than stock B. The key words here are “over time.” Day-to-day movements in any and all stocks have proven over and over to be statistically random; there is not way to predict whether the price will go up or down at any point in time unless you have information that is not available to other investors, which is a bad option as it is likely to land you in prison. So, long story short, unless you adopt the Warren Buffet buy-and-hold long-term strategy, your day trading is no different from playing black or red in roulette: you win on 1/2 your trades and lose on the other 1/2. The balance is trading fees and taxes, which inevitably will place you deep in the negative.
Getting back to Malkiel. How does one make money in the Market? The answer; select a random portfolio of a minimum of 12 stocks, buy and hold them for the long-term. You can do this by taping the financial pages of the Wall Street Journal to your garage wall, throwing 12 darts at them and build your portfolio with the symbols closest to where the darts land. This is called “diversification,” which means by choosing stocks at random, an investor is afforded the hidden benefit of the random day-to-day price changes. Some stocks will increase in price, while others will decrease but, over time, there will be a bias towards higher prices. This provides a profit/loss offset that, over time, are guaranteed to result positive returns.
So who makes money day trading? Market Makers on the trading floors of the Big Houses (Goldman, JPMC, Morgan Stanley, etc.) These folks move volumes of stocks that are large enough to move the price up (buy) or down (short.) By long and short selling on their own trades, they make small “haircuts” that amount to lots of cash when you consider the sheer volume of long and short trades. So unless one has a $B or so to throw into day trading, one has pretty much no access to this type of program trading.
Back to my story. I was highly disappointed at learning that I’d never get rich trading, MBA or not, however, I appreciated the heads up: avoid day trading like the plague.
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