Day Trading vs Long-Term Investing: Why Howard Marks Thinks You're Missing the Bigger Picture
It's 2 AM, and you're on Reddit. You see traders there celebrating their daily wins of $500, while just a bit down the page, long-term investors are revealing that their portfolios are up 200% over a three-year stretch. The conflict that this presents to the sort of person who might be up at this hour, scrolling through trading-related subreddits, is... quite emotional.
This precise quandary erupted onto social media when billionaires investor Howard Marks made a direct observation about the day traders. Marks said, "Day traders considered themselves successful if they bought a stock at $10 and sold it at $11, bought it back the next week at $24 and sold it at $25, and bought it a week later at $39 and sold it at $40. If you can't see the flaw in this—that the trader made $3 in a stock that appreciated by $30—you probably shouldn't read the rest of this book."
The Reddit trading community didn't take this lying down. They flooded in with thousands of comments, seeing experienced traders and sharing real-world examples of why day trading isn't just about missing the "bigger picture" and managing risk. As they saw it, day trading is a way to create a consistent cash flow and is a wealth-building methodology that has nothing to do with long-term investing. If you're a fan of short-selling, day trading, or any other way of using up and down trends to your advantage, you might want to explore the world of cash-secured puts and protective puts.
Understanding Day Trading: Fast Moves, Fast Risks
Day trading involves buying and selling financial instruments within the same trading day, often multiple times, with the goal of profiting from short-term price movements. Unlike traditional investing, day traders close all positions before the market closes, avoiding overnight risk.
Let's start with the hard truth: Only 13% of day traders maintain consistent profitability over six months, and just 1% achieve success over five years. Even more sobering, 72% of day traders experienced financial losses in 2020, according to FINRA data.
The Day Trading Advantage: Flexibility and Risk Control
Reddit investors highlight many pros that Howard Marks' critique doesn't grapple with. Here's why they think it's okay to trade like it's 1999 again.
Efficient use of capital: Day traders are also buying 10,000 shares and selling them after making a dollar profit. A long-term investor would be using maybe 100 shares to make the same investment.
Risk Management: "In day trading, a stock can shift from $10 to $11 to $10 and a day trader will pocket up to $2 profit that day. Moreover, during bearish market days, my day trading gains usually offset my long-term position daily unrealized pullback losses."
Long-Term Investing: Compounding vs. Complacency
Starting in 1957, the S&P 500 has brought in an over 10% average annual return, delivering substantial long-term wealth to investors who have put their faith in it and let time do the rest. To be exact, in the 100 years prior to 2018, the S&P 500's very quietly muttered law of large numbers had it spewing forth 10.463% annualized returns. Most of us will just round that to 10.5% and call it a day.
The average yearly return from 1928 to 2024 has been 8%. But the compound annual growth rate has been 6.2%. This shows that we need to understand several different ways to calculate returns.
Conclusion:
Most day traders ignore significant long-term profits and instead concentrate on small daily ones. Howard Marks isn't entirely wrong when he critiques day traders. However, the day trading protests by the Reddit community that assert day trading isn't a stupid strategy highlight an important truth: there's no one-size-fits-all investment strategy.
The crucial understanding isn't that day trading is undesirable or that long-term investing lacks excitement. It's that effective investing demands a candid evaluation of one's character, objectives, and skills.
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