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Discussion Starter · #1 ·
No, this is not spam :eek:)
I noticed this article on Yahoo news and found it interesting:
http://ca.finance.yahoo.com/persona...ane-investing-strategies-for-sky-high-returns

It talks about 3 possible strategies if you wanna get rich purely by investing.
It also briefly covers the experience of Derek Foster, often discussed on this and other forums, and how he achieved his so-called "early retirement".

The article dutifully outlines all the risks for each strategy and the personal attributes needed for each type of strategy.
As expected, each of these are a lot of hard work and none of them is a get-rich-quick scheme.
 

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I have heard this over and over but it just doesn't make sense to me. daytraders give back their gains and break even over time.

Doesn't Goldman Sachs have an army of daytraders working for them? I'm pretty sure they make money.

Or would people have us all believe that as soon as all these successful professional traders go home they forget everything?

I'm not sure about that.
 

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Discussion Starter · #4 ·
I have heard this over and over but it just doesn't make sense to me. daytraders give back their gains and break even over time.

Doesn't Goldman Sachs have an army of daytraders working for them? I'm pretty sure they make money.
The difference is between individual and institutional traders.
The chances of one single (the same) individual succeeding at day trading year after year as a primary source of income are very slim.
It does happen, but those cases are rare. And they are a mix of sweat and luck.
OTOH, institutions (esp. ones like GS) have resources, strategies, contacts and leverages at their disposal that even the wealthiest of individuals cannot muster.
They are able to trade at margins and spreads that an individual day trader working out of his basement can never come close to.
They can hedge their bets like individuals never can.
So for most retail day traders, it's a suckers game.
And yes, I have known day traders who made out with say $2,000 net profit at the end of the year after trading all night and sleeping at work.
 

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I have heard this over and over but it just doesn't make sense to me. daytraders give back their gains and break even over time.

Doesn't Goldman Sachs have an army of daytraders working for them? I'm pretty sure they make money.
It's the "over time" bit that's crucial. As a daytrader you can make yourself (or your employer) millions in any given year, but because chance plays such a large role in day trading, odds are that your luck will run out eventually. Theoretically, a daytrader can have a 20-year run of good luck and get wiped out in one year of bad luck.

Even the daytraders who do research and know their fields inside and out are still largely playing a game of chance, because unpredictable events can happen.

If you have a legion of daytraders working for you, the end result is like a mutual fund: the risks are spread out over a group of traders so overall you should come out ahead even if 20 or 30 percent of your traders are losing money.
 

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I think another factor is the amount of funds to work with.

Most "regular" individual investors just don't have enough funds to make enough profit to make it worthwhile unless they can beat the market by an incredible amount.

I suspect a lot of the big trading desks only beat the market by a small margin over time (if they beat it at all). But if you have a multi-billion dollar fund then an extra 0.2% is a large amount.

For a Joe Smoe who has $200k to play with - he needs to beat the market by 25% to earn $50k per year. I'm not counting market gains as part of the profit since that can be earned without any effort.

This post is more or less related to this idea: http://www.four-pillars.ca/2008/01/15/do-you-really-earn-your-investment-income/
 

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I think the reason trading works for institutions but not individuals is due to emotions mainly.

"Your emotions are your weakest link. Controlling your responses to both gains and losses is harder than simply reading an article and intellectually knowing the problem exists. Many successful institutional traders quit their job to work for themselves with their own money, thinking they would then keep all those profits. But they react differently when trading with their personal money. With institutional money, traders feel an emotional detachment. Those same successful traders fall prey to the same errors as the retail investor when gains and losses become personal.

Institutions have successful trading floors because of their cash employment rules, their exposure rules and their bosses overseeing the traders to enforce those rules. In the isolation of your home, you lack these valuable checks and balances. Institutions also have broad information gathering networks for market-moving events. The retail investor will always be behind the curve. Don't presume that just because institutions have successful trading floors, that you also can be successful trading shares with technical analysis."
 

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Leveraged investing: I'm not convinced that it is such a big money maker for long-term investors. The reasoning is quite simple: stock investors typically earn a premium of 3 to 4 percent over the risk-free rate. When you borrow to invest, you are typically paying an interest of more than 2 percent over the risk-free rate. If you have the fortitude to stick with the program through thick and thin, you'll net gain 1 or 2 percent on your borrowed money on average over the long-term. Is this such a "high-octane" strategy? You could instead take more risk by boosting your exposure to stocks.

Day trading: I once heard from a discount brokerage insider that 99% of day traders lose all their capital within two years. I don't know if the claim is true but I can buy the claim that day trading is a losing proposition for retail investors. It simply makes sense: the more you trade, the less your returns will be.

Specialist: Theoretically, this would work. You could analyze companies that are little-followed by institutions to gain an edge over retail investors. Practically, though I wonder if this is feasible with full-time jobs, family and other commitments that most of us have. Not to mention, the long list of emotional traps that most of us fall prey to.
 

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Discussion Starter · #9 ·
Leveraged investing: I'm not convinced that it is such a big money maker for long-term investors. The reasoning is quite simple: stock investors typically earn a premium of 3 to 4 percent over the risk-free rate. When you borrow to invest, you are typically paying an interest of more than 2 percent over the risk-free rate. If you have the fortitude to stick with the program through thick and thin, you'll net gain 1 or 2 percent on your borrowed money on average over the long-term.
Leveraged investors typically don't do buy-and-hold investing of blue-chip, dividend paying stocks or ETF investing.
Leveraged investors (at least those who are in it on a FT or near FT basis) buy and sell on a regular basis and don't limit themselves to stocks/bonds. They need to understand and trade the entire range of securities such as futures, forex, options, etc.
The idea is to earn more than 3 or 4% premium over risk-free investing.
Leveraged investors I have spoken to aim for 12% to 20% annualized returns.
And that is regardless of bull or bear markets - they need to make money regardless of market conditions.
Such returns cannot be achieved by buying and holding common stocks or ETFs.

Whether they are able to do it consistently enough year after year is a different matter.
I'm sure there are folks who can sustain those returns but that's probably an exception rather than the rule.
If it were that easy, everyone would be doing it.
 
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