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This post on WSB from a few weeks back inspired me to take a better look at the claim that you are more likely to make money as a gambler than by day trading. Here is what I found.
First, let’s cover the gambling side. The data comes from this WSJ report and it has some fascinating insights.
When researchers analyzed the performance of 18,000 regular gamblers in casino games, only 13% won over a two-year period. But, on any given day, if you walk into a casino and play a game like blackjack, roulette, or slots, you have a 30% chance of making a profit. The only way to win would be to quit while you are ahead, and most of us won’t. In the end, the house always wins.
While these numbers look atrocious, they are nothing compared to day trading stats. By gambling, you have a 13x better chance of making a profit than when you are day trading.
For the study (open access) researchers evaluated the long-term performance of 450K+ day traders from 1992-2006 in the Taiwanese stock market. The data contained 3.7 billion transactions with a transaction value of $10 trillion. And almost all day trading was done by individual investors.
The results were eerily similar to gambling. In a given year, 20% of day traders earned a profit net of fees. But less than 1% of traders from this group could generate a profit the following year.
The top 500 traders (0.1% of the population) had clear performance persistence and earned outsized alpha of 61 bps per day before costs and 38 bps per day after fees.
In aggregate and on average, trading is hazardous to your wealth. Unless you are in the top 0.1% of traders based on skill, you are much better off gambling — or, better yet, investing in a low-cost, diversified portfolio.
WSJ paper on gambling — here