The cost of trading
The more often you trade, the faster your wealth flows to brokers, the government and the other side of the trade.
In One Sentence
An individual investor's biggest enemy isn't the market but trading too often: every time you get in or out, a little of your wealth flows to brokers, the government and whoever took the other side.
Why It Matters
Individual investors lose mainly not because of poor judgment, but because they make too many moves. Research in Taiwan found that more than 60% of individual investors' trading losses went to commissions and transaction taxes; add chasing rallies and dumping in drops, and money drains away with every round trip. So my approach is simple: the less you move, the less you lose.
One Number
The money Taiwan's individual investors lose each year through trading comes to about 3.8% of the amount they invest, equal to 2.2% of Taiwan's GDP each year (Barber et al. 2009 · Chapter III).
In the Book
Chapter III cites research based on the Taiwan Stock Exchange's complete trading records to work out individual investors' real results. Chapter IV explains why individual investors keep getting "fleeced" again and again.
Go Further
- The timing trap When it comes to guessing short-term ups and downs, fewer than 1% of day traders profit consistently.
- Fees and costs Each commission and tax is small, but together they add up to a lot.
- Borrowing and leverage Borrowing plus short-term trading is what the book's two painful cautionary tales have in common.
- Broad-market index ETFs Buy the broad market through dollar-cost averaging and rarely trade, and your costs will naturally be the lowest.