It is quite common to see “professional traders” on the internet or on television who promise us extraordinary returns through short-term stock market speculation strategies.
Are these returns real?
Are they available to anyone?
Is it as pretty as it looks?
In this article we will look at the reality of short-term stock market speculation based on real studies. I will explain what you should know (and almost no one will tell you) about this world.
I assure you that this article will not leave you indifferent.
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- methods that exist to beat the market and which are the most recommended for small investors.
The two most popular are value investing (long-term) and short-term speculation through technical analysis:
- El value investing it has proven to be the safest and most profitable investment method. It is the most popular method of long-term investment.
- Share análisis técnico I have also spoken on the blog on more than one occasion. It is the most popular method of short-term speculation.
The profitability of investing in the stock market in the long term
Before starting to analyze whether short-term trading or speculation is profitable, it is important that you get an idea of the real return that can be obtained through long-term investment in the stock market.
- 6,7% per year after inflation is the average profitability of the stock market in the long term
- 2,5% is the profitability of the small average investor (less than 1% discounting inflation)
- 20% is the annual profitability of Warren Buffett long-term (the best investor ever)
- Between 10% and 15% is the average annual return that a trained and experienced investor can obtain
As you can see, these returns, even that of the legendary Warren Buffett, are very far from those promised by many short-term speculators.
The real profitability of speculating on the stock market in the short term
Is it as profitable to speculate on the stock market in the short term as many promise?
We will study this question next.
Studies on the real profitability of speculating on the stock market in the short term
As I have mentioned, short-term speculation strategies tend to have in common that they are based on technical analysis. It is a speculation method that is based on buying and selling shares based on the past movement of the share price.
The most in-depth study on the profitability of short-term speculation through technical analysis so far is “value investing.
However, despite the empirical evidence, so-called “professional traders” continue to appear like mushrooms on the internet who promise impossible returns in a short time available to anyone. I'm talking about returns that would leave Warren Buffett (the best investor in history) at the height of the bitumen.
Do you want a 100% annual return?
Or better a 100% monthly profitability?
And why not a 100% weekly return?
Yes, I have seen many such promises. All based on so-called "proven methods" of short-term speculation.
Everything is possible with short-term speculation!
The sad reality ... It is nothing more than a scam
Promising great returns is very easy. Proving it (without cheating) is something else.
These scammers have several things in common:
- They do not show what they earn (or they do it with deception)
- They don't beat the market
- They do not beat the market considering the transaction costs
In fact, these scammers do not make money from their trades on the stock market, but live or have the objective of living on sponsorship of brokers and the sale of their scam courses.
Why would a person who earns 100% annual (or monthly) profitability go around uploading videos to YouTube selling his secret method?
Be very careful with all these scammers out there!
Options, warrants, CFDs, forex, binary options ...
The speculation industry and its lackeys do not stop reinventing themselves in order to take advantage of small savers.
If you are interested, I recommend this article in which I tell how they tried to scam me through a financial bar.
In a future article we will see the tricks that scam traders use to make us think that they are making money by speculating in the short term, when in fact they are not.
Is it ethical to speculate in the short term?
I want to clarify that I have nothing against speculating on the stock market in the short term. In my opinion, it is as ethical as investing for the long term. In fact, short-term speculation helps to generate liquidity in the markets.
Moreover, if it were more profitable to speculate on the stock market than to invest in the long term through value investing (which, as you know, is the safest and most profitable investment method), I would do it. The problem is that short-term speculation through technical analysis is simply not profitable for investors. For that reason I do not invest that way.
Who I am against is the people who scam small savers by promising impossible returns to get those savings that are so hard to earn.
But hey, I'll talk about them and the tricks they use in future articles ...
We're going to stick with more downsides of short-term speculation than short-term speculation that few take into account.
More downsides of short-term stock market speculation
In addition to the more than dubious profitability of short-term speculation, it also has other problems that we sometimes overlook.
Higher spending on commissions
The biggest expense for an investor, along with taxes, is broker commissions.
The more operations we do, the higher the cost (and, therefore, the lower our real profitability).
A trader who speculates in the short term can make several operations a day, with the very high cost that this implies. On the other hand, a long-term investor does not usually do more than one operation per month on average.
By the way ... have you noticed that the vast majority of "professional traders" are sponsored by trading brokers?
Yes, the same ones that are made of gold thanks to the large number of operations made by small savers who have "learned" to speculate in the short term.
Could it be a coincidence?
Surely yes! Do not be ill-thought!
Higher tax costs
We must always take into account tax costs, which many investors overlook.
Long-term investment allows us to defer the payment of our taxes, since we do not have to go through the treasury until we sell our shares. On the other hand, if we speculate in the short term we will have to spend all our capital gains through the Treasury each year (in the very rare case that we are part of the less than 2% of short-term speculators who do not lose money that year).
In addition, many tax systems tax short-term returns on movable capital much more heavily. For example, in Spain during 2014 it was much more burdensome to pay taxes for profits in the financial markets in the short term than in the long term:
- Long term: Up to 27% tax
- Short Term: Up to 52% taxation
If this were not enough, the Technical analysis is stupid (Investment Academy)
- The incompatibility of value investing with technical analysis (Investment Academy)