A sure way to loose money
By Alexander Chepakovich, CFA 2011-09-26Let's face it: we are all in the markets for the money. We want it all and we want now. However, it is an illusion that one can easily strike it rich here. Of course, we hear about such instances all the time, but in the vast majority of cases it is pure luck, or, scientifically speaking, a statistically expected outcome of many trials. It is very hard to make money in the market consistently, no matter what anybody tells you.
Do you want to have a chance to win one million dollars without the risk of losing any money? Well, CNBC's 'Million Dollar Portfolio Challenge' offers you such an opportunity: http://milliondollar.cnbc.com/. For CNBC and sponsoring brokers, it is a great marketing tool. For sure, they are expecting large risk-free gains from it - if you decide to continue to play the game even after the contest is over (this time risking your own money, though).
The Million Dollar Portfolio Challenge has started on September 19 and will close on November 25. One can build a simulated portfolio of stocks and currency positions. It is a great toy – much better than the roulette. The greatest danger is to get addicted to the game, the organizers of which are enticing you to acquire a taste for frequent trading.
In my opinion, one can only has a chance to consistently beat the market if he places long-term bets based on fundamental analysis. Fundamentals usually take years to play out in the market. The two-month competition offered by CNBC is a way for novice investors to get burned in the market if they will not stop after the competition is over.
Theoretically, by making many random small bets, one should have a 50% chance of gaining (the same for loosing). However, we are disadvantaged by our human nature: we tend to close profitable positions too early and cut out losses too late. Therefore, in the real world our chances of gaining anything in short-time trading are significantly less than 50%. Statistics shows that around 75% of all day traders loose money.
Brokers, on the other hand, make their money by chipping out a fee (or bid-offer spread) from every trade. The more you trade – the better for them. CNBC makes its money from advertising. To sell ads to advertisers they need you to watch their programs. Day traders are glued to TV and computer screens in a hope to make money on any news. They are the most captive audience. They are also the ones willing to spend extra on anything that would allow them to get an advantage over the average Joe on the street. All of this, however, is in vain: you are not playing against the average Joe – you are playing against the market and you cannot beat it in the short-term.
My advice for short-term traders: get out of this fantasy world and get a life. If you want to stay in the markets – fine, but invest long-term and on fundamentals. Do not use leverage and do not bet more than you can afford to loose. Also, do not take everything they say on CNBC for granted – they have their own motives, which, in my opinion, are quite contradictory to what is good for you.