Thread by @smdiehl

With Gamestop and Robinhood recently in the news I've seen quite a few developers making some very silly and needlessly risky financial decisions. Let's talk about investing a bit. 🧵(1/)

First a BIG disclaimer. Giving financial advice outside of an advisory relationship is illegal. This is not investment advice, just my personal opinions.

However it is common knowledge there are well-known ways to needlessly light money on fire. Let's talk about those. (2/)

The first is day trading. Day trading is a ridiculously stupid activity, and not all that different from gambling or other risk-seeking addictive behaviour that hacks your brain's dopamine-cycle. Not even once. (3/)

Day trading is trying to predict the short-term price movements of individual stocks based on intuition, charts, social media, models or trend following and then actively trading on those ideas intraday.
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Day trading currencies, options contracts, CFDs or other options-like products offered by retail apps and platforms is even riskier and stupider. The overwhelming majority of retail accounts that trade these products lose money.

ft.com/content/2e436d…
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Now you can make money *randomly* trading, that's not hard.

You cannot and will not make money consistently actively trading. The expected return on predicting short term price movements of individual assets is negative. Consistently beating the market is very hard.
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Even if you think you have some (public) information about the company's stock that you're buying, the market is very efficient and by the time you can enter a trade based on that information that information is already reflected in the price.
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Sophisticated investors have access to better research, better models, historical data and faster market access faster than you can ever possibly have and will eat your lunch every day if you trade against them. Just accept this as part of the reality of our system.
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But ultimately that doesn't matter because active trading isn't a great game to play anyways.

Nobody that has bought a diversified basket of equities and held it for 20 years has lost money in this market. In fact many times they outperform most actively managed funds.
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Two-thirds of US equity funds underperformed benchmarks over last 12 months. So the most sophisticated investors, with the most access, best models and highest paid portfolio managers mostly underperformed just straight up buying the weighted market index.
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To the extent that funds do make short-term returns, they make it by trading on information and access to products that retail investors don't have and can't buy.

Often by exploiting tax loopholes, inside information or market infrastructure itself.
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People often have bias that because they made a little bit of money in the past they have some insight into the market and can translate that into future gains. You really can't do this consistently, it's a cognitive bias to over-consider wins and under-consider losses.
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Fidelity did a study about the best performing retail accounts they managed, and you know what the highest correlate of performance was?

The investor being dead.

fool.co.uk/investing/2016…
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Seriously, the accounts that performed the best weren't the ones where the investor was logging in daily, tweaking it and building new strategies. It's ones where the person had passed away and let it passively sit.
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Unless you're Jim Simons or Warren Buffett (spoiler: you're not) picking individual stocks because you think "it's a winner" is generally a rubbish idea and fraught with a lot of cognitive biases and risk.

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en.wikipedia.org/wiki/Jim_Simon…

People that invest sensibly buy passive investments and work with advisors to build portfolios tailored to their risk-return and are resilient against market volatility.

This is what rational individuals do rather than silly day trading and stock-picking on Robinhood.
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So the unsatisfactory (but true) moral of this story, is there's no free lunch. There's no easy path to short term risk-less gains and beware of anyone who claims otherwise.

The smartest people in the world can't beat the market, and you can't either. So don't try.
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Getting rich slowly by doing sensible and responsible investing today is isn't that hard. Certainly don't take financial advice from social media influencers, celebrities or people on the internet (including me). If it sounds too good to be true, it probably is.
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Final note: Stay the hell away from unregulated assets like cryptocurrencies. They have no valuation method, are insanely volatile and do nothing but add uncorrelated risk to your portfolio.

Trading unregulated financial products is like having unsafe sex. It's a bad idea.

/fin