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102 Key Principles for Success

Principle 86 - Trading is Gambling

I learned the hard way that Trading is gambling.

If you think you can make money trading stocks, you're probably mistaken.

You may be successful for a time, but eventually, you will lose a lot of money.

I knew a trading millionaire. I worked with an immigrant from China who had $2 million in winnings from the stock market. She was lucky. She worked at a company called Zip Drive, I don't think they're still around. But she saw lots of orders coming into the company. She bought $50,000 worth of stock. This initial investment ballooned to around $2 million. But something happened.

Was it the economy, stock market or bad luck. Her $2 million dropped to way below. It affected her job, her marriage and probably her health.

You may think if you had $2 million you would put away half of it and just play with $1 million. If you think you could you're wrong.

Another issue with trading is what is known as transaction costs. Each time you buy and sell a stock you have to pay a broker's commissions and also the spread between the buy and ask price.

Is it impossible to make money from trading? Nothing is impossible this is one activity that looks much easier than it is.

When you buy a stock there is someone else who is selling the same stock to you. When you sell, someone is buying that stock. Now I know for a fact because I worked at a number of hedge funds that they have many advantages over you, so it's not really a fair fight. Some examples:
  • They had a system that reported drug prescription sales on a weekly basis - $60,000
  • They had a biotech analyst with a Ph.D. from Harvard Medical school
  • They had meetings with doctors that where doing drug studies to find out how they were going
  • They had meetings with a US Senator to discuss who knows what. Do you get this?
  • The would bet on how Congress would vote on a legislation that would affect the stock price
  • I could see my boss on TV at a congressional hearing
  • I would hear them getting what appeared to be information that you don't have over the phone
Now I don't know if anything illegal was done, but it seemed like they were bringing a flamethrower to a stick fight.

In the late 90s I had a Reuters Feed on my computer. I would see the prices of various stocks going crazy. Yahoo was my first bet. I bought 100 shares at $300 and right away was down. I was down thousands of dollars very quickly. I wanted to get out but my wife made me hold on. The stock eventually came back and I made around $5000 on it. Having a winning first trade in the market was very unlucky. That's right I said "unlucky." Had I lost money I probably wouldn't have played the stock market again. But after following bad advice from Investor's Business Daily, a newspaper dedicated to the stock market, I lost 10x the amount I gained.

I even bought some ETFs and lost thousands of dollars. The Nasdaq lost 80% of it's value.

Even a bet where you flip a coin, you will lose all your money if you play against someone with a lot more money than you.