2% gain-and-out trading plan on the stock market

Question

I am really new to the stock market and very very green...I've seen a question on day trading on the stock market and making 1% per day and reinvesting the next day, creating compound trading...I understood the answers and realize that this is impossible for 99.95% of traders. The responses were very well explained.

Can you pick apart this scenario for me please...

• I invest in 20 companies at $500 per company and leave for the long term...
• I pick 10 good ones and 10 bad, but make 8% per year on average, on the total investment, on paper...
• if the stocks lost 8% the following year I would be back to my original investment.

Here is another scenario:

• I invest in 20 companies at $500 per company ...
• Each time the price of the stock goes up (even if only 1 moves each month) 2% I sell that stock for $510 and invest $510 into another company...
• I pick 10 good stocks and 10 bad...
• If the stocks made and lost the same value, as in the 1st scenario above, wouldn't my original investment still be worth $100 more as I picked 10 stocks that made $10 each.

You can call me stupid but please don't swear!!

Answer 1

Common fallacy ...

Every new trader "invents" this idea.

You'll simply get closed out as stocks move down.

So,

I [buy a stock] and each time the stock goes up (even if only 1 moves each month) 2% I sell that stock ...

It's completely commonplace that you buy a stock, and from that day forward it goes only down, whatsoever.

In your example just one of your $500 bets could turn in to, say, $120 or $150, making you lose 300 or 400 bucks.

Or you could "merely" lose $200.

That enormous loss on just one of your "plans", would completely wipe out the pathetic gains of a few dollars you are making from all your other "plans".

I hope it makes sense.

One loss utterly wipes out literally hundreds of other "wins":

To try to explain it another way:

you are simply wildly underestimating how often and much you lose when you try this.

You'll find this question will probably just get closed because every single new trader "invents" this idea. Every. Single. Time.

In the history of the universe, Every Single Person who has thought about "trading! stocks!" has "invented" this idea.

You now know clearly why it doesn't work: you are simply wildly underestimating how often and much you lose when you try this.

These days you can very easily "paper trade" stocks. I urge you to try it.

I will give you 10 thousand real bucks if you can show it worked.

Enjoy paper trading!

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BTW there's a similar "everyone invents this..." with gambling. Every new gambler, say roulette player, invents the Martingale "method". (You can google it up.) It too (obviously, or everyone on Earth would be a billionaire) has a Fatal Flaw.

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Unrelated question. Stock picking:

Regarding unrelated "Scenario 1" also mentioned in the question...

That's just called "stock picking". (You better be good at picking the 20.)

The more you have in the basket, the safer it is. The less you have in the basket, the more risky it is in both directions. In fact ........... the very best way to invest is nothing more than:

That's the whole story.

There's nothing else to "investing".

If you think you can pick a basket of "20" stocks, where you believe Your Basket will do better than an ordinary S&P index fund: that's just called "stock picking".

You will not be able to do better than an ordinary S&P index fund.

10,000s of stock pickers try this every year ........... and they all spectacularly fail.

How to lose 50 billion in a few months:

Here's a joker who lost fifty billion dollars by picking a basket of 20 or so stocks - literally exactly as in the question.

(Hilariously: afterwards, the guy in question, the only thing he had to say for himself was: "Yeah. It's hard to beat the S&P." OK, no shit Sherlock. Nice call. Good way to lose 50 billion of other people's money.)

Some "beat the S&P" 1 year out of 10 or 20, which is just random.

Answer 2

Making 1% a day is quite possible for a few days or even a few weeks if you're on a have a hot streak, and you're trading a small amount of money. But doing that consistently is impossible. No one makes 250% a year (trading a fixed amount) or 1,100% if you're compounding the 1% gains as well).

Here's a simple example to demonstrate the problem with your strategy. Suppose you invest $500 in 3 stocks.

• Stock A makes 50% and that's + $250
• Stock B makes 24% and that's + $120
• Stock C loses 50% and that's - $250

Your total gain is $120 so your yield is 8% ($120/$1500). Success! Your strategy works!!!

But wait, you said that you were going to sell your stocks when they rose 2%. Oops, because of that, you didn't make $250 on Stock A and you didn't make $120 on stock B. In fact, you only made $10 on each so you have a net loss of $230 or -15.33%.

The fallacy in your strategy is your assumption that you "pick 10 good stocks and 10 bad ... (and) the stocks made and lost the same value." Sorry, but it doesn't happen that way. Stocks will have varying amounts of gain and loss.

One of the most important tenets for a trader is “Cut Your Losses and Let Your Profits Run”. You've reversed that by cutting your profits and assuming that your losses won't be more than a small amount. Some will lose more than a modest amount.

Successful stock trading requires that you have an edge (a strategy that works) as well as disciplined risk management. Your strategy has neither.

As an aside, in March, the stock market dropped about 35%. How do you think that your strategy would have worked then?

Answer 3

First, picking apart the math:

• Making 1% per day on average is not realistic - that would be an 11X gain over a year. 0.1% on average (some days making 5%, many days losing 1%) is more realistic and still pretty good.

• If the market makes 8% one year and loses 8% the next, it doesn't make 8% "on average". A more realistic scenario would be if it makes 16% one year and loses 8% the next, in which case you've made 6.7%.

• If you did make 8% one year and lose 8% the next, you've actually lost 0.64% (((1 + 0.08) * (1 - 0.08)) - 1 = -0.0064.

• If you buy and hold stocks for 10 years, and make 8% per year, after 10 years you'd have a total gain of 116% (more than double). So no, an 8% loss in one year won't get you back to zero.

Now the strategy (simplifying the math significantly):

• If you sell a stock for $510 and buy another for $510, you still have the same amount invested, so if the odds of picking a winner are always 50%, then you haven't changed your return profile - you have just as much chance of losing with the new stock as you did with the old.

Answer 4

• I pick 10 good ones and 10 bad, but make 8% per year on average, on the total investment, on paper...
• if the stocks lost 8% the following year I would be back to my original investment.

For one thing, your math is wrong.

$100 up 8% = $108

$108 down 8% = $99.36 (A fall back to $100 is a 7.41% drop.)

Answer 5

if the stocks lost 8% the following year I would be back to my original investment.

Not exactly.

If you start at $500, and it goes up 8% that gives you a value of (500*1.08) or $540.

The next year the 8% drop is from $540 down to (0.92*$540) or $496.8.

If the moves end up in the reverse order, the answer is the same.

Stock prices don't compound. If you pick a company to invest in, you don't know if it will perform better or worse than the average. And by average we mean compared to an index. But even an index doesn't have consistent growth in either the short term or the long term.

If the stocks made and lost the same value, as in the 1st scenario above, wouldn't my original investment still be worth $100 more as I picked 10 stocks that made $10 each.

When you sold the shares for the $10 profit, that is good. But then you invested the money back into the market. The impact isn't clear cut. The new investment now has less than a year before you take the next measurement. You did convert paper gains to real gains, and depending on where you live, how the money is invested, and other issues your national taxing authority may want a chunk of that real gain the next time you file your taxes.

You could have saved the gains, by taking them out of the market, but in today's environment the amount of money earned in a savings account is pitiful.

Selling an investment to lock in a gain, when you aren't convinced that the stock has reached its maximum doesn't preserve your gains. It just limits your opportunities for growth, and lets you roll the dice with a new choice of investments.