The math is simple. Buy and hold strategies are statistically superior to trading strategies as proven by the laws of probabilities. This is how I view it but am open to debate and aspects I am missing. Keep in mind I am intentionally keeping this simple and ignoring lots of nuance. Also, I only invest in index funds that will never go bankrupt, so keep that in mind. Regardless of the ETF vs individual stock argument, I think this math is sound and important to consider.
If you are a day trader, every decision you make has only a 25% chance of success. Some may misinterpret the grid below and say chance of success is 50/50, but that isn’t correct since your probability is limited to one decision and one outcome at a time. Overall chance of success is 50%, but each decision you make only has a 25% chance. It’s kind of like the Monty Hall problem.
Day Traders
Market up Market down
Buy 1/4 * 1/4
Sell 1/4 1/4*
* successful outcome
Compare this to a buy and hold strategy where your decisions always have a 50/50 chance of success. You never sell, therefore you never open yourself up to the sell probabilities.
Market up Market down
Buy 1/2 * 1/2
* successful outcome
A delta of 25% between the decisions made by trading vs buying and holding is significant.
Leave a Reply