Despite the mountain of evidence against it, day trading is thriving. Today we dive into the research and explore why the practice is alive and well before answering the question — “Can too much confidence lose you money?” After touching on investing news, listener feedback, our books of the week, and our take on the ‘Ultimate Ned Debate,’ we open our discussion on day trading. In our conversation, we look at the results of numerous papers on the topic, none of which present-day trading as sound financial practice. We shed light on the reasons that people day trade, the performance differences between traders, what a day trader’s learning process looks like, stock-picking strategies, and why it’s impossible, except in outlier cases, to earn a living as a day trader. As we unpack the literature, we discuss key insights on the impact of day trading on the financial world. From one investing sin to another, we talk about how overconfidence can harm your investment performance. We balance the positives and negatives of having confidence, highlighting how too much confidence can lead to poor decision-making and a false sense of how much you know. Tune in to hear some of the latest investing news and to learn more about the pitfalls of day trading and overconfidence.

Watch this conversation on the Rational Reminder YouTube channel

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Key Points From This Episode:

  • Acknowledging the 33rd anniversary of Black Monday. [0:01:08]

  • How the podcast is faring against other podcasts within the investing category. [0:02:07]

  • News on past and upcoming episodes and responding to listener feedback. [0:04:09]

  • From technological revolutions to starting with a ‘why’, we explore the books of the week. [0:07:23]

  • Top news story; Fidelity Magellan Fund is moving to an ETF format. [0:12:06]

  • Weighing in on the “Ultimate Nerd Debate” on the value and risks of small-cap allocation. [0:14:45]

  • Why performance doesn’t change when you invest in a fund using a different currency. [0:19:12]

  • Introducing today’s portfolio and planning topics — day trading and overconfidence. [0:21:56]

  • Examining the data sets and papers that assess the effectiveness of day trading. [0:23:48]

  • Analyzing two competing theories that explain the behaviour of day trading. [0:25:57]

  • Attributing a portion of all portfolio return losses to the effects of day trading. [0:30:39]

  • Comparing the performance of the best and worst day traders. [0:33:52]

  • Why it might be impossible for you to earn a living as a day trader. [0:36:58]

  • Applying Michael Mauboussin’s ‘Paradox of Skill’ to day trading. [0:39:50]

  • Three reasons why people still day trade, despite evidence that they make for bad investments. [0:42:38]

  • Which stocks day traders trade and how they pick their stocks. [0:45:42]

  • Why overconfidence can turn you into your worst enemy. [0:50:25]

  • Trends in which investors develop an inflated sense of how much they know. [0:56:02]

  • Hear this week’s bad advice of the week; ignore the data and only invest in excellent companies. [01:01:24]


Books From Today’s Episode:

Technological Revolutions and Financial Capital on Amazon —

Start with Why on Amazon —

Links From Today’s Episode:

Rational Reminder on iTunes —

Rational Reminder Website —

Rational Reminder Merchandise —

Common Sense Investing on YouTube —

Rational Reminder Community Discussion —

‘How Great Leaders Inspire Action’ —

‘Trading is Hazardous to Your Wealth’ —

‘Just How Much Do Individual Investors Lose by Trading?’ —

‘The Cross-Section of Speculator Skill: Evidence from Day Trading’ —

‘Day Trading for a Living?’ —

‘Alpha and the Paradox of Skill’ —

‘Is Too Much Confidence in Your Investing Knowledge Harmful to Your Investing Performance?’ ‘Investor confidence: Are you your own worst enemy?’ —

Bad Advice of the Week Article —

Learning Fast or Slow? –

All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors –