No, casino gambling is no more profitable than daytime…

Don’t believe your eyes. Illustration is the Blarney of social media.

Frankenstein’s monster

The source of the graphic remains a mystery to me. Although each link above is from the last 12 months, the underlying paper was published a long time ago. The results for casino players come from an October 2013 article in The Wall Street Journal, while the original research on day traders began in 2004. (This link is to a newer version of that paper, also published in 2013. )

Apparently the graph was created last year when someone combined these two findings. This created a problem as the research was carried out by different parties, none of whom realized the other existed. The chart’s wording reveals the inconsistency: “13 out of 100 players leave the casino a winner,” while “1 out of 100 day traders reliably beat the market.” The statements are different. So are the parts for Frankenstein’s monster.

From the Rekenthaler Archives: When Investments Go Over the Limit in Gambling.

Gambling vs. Day Trading: Unaligned Standards

Let’s start with the players. That 13% quote is slightly off. This number does not come from published research, but from a background check requested by the authors of the Journal story. The article’s official figure for casino gambling outcomes is 11%, taken from a Harvard Medical School study of internet gambling.

Eleven percent instead of 13. Pretty close, I guess. The main point is that these results are mere percentages. They represent the number of players who made profits during that two-year period divided by the total number of participants. (That period of time sounds substantial, but since gamblers who bet only four days in those two years qualified for the study, the subjects weren’t necessarily addicted to gambling.)

In contrast, published totals for day traders are statistically significant estimates. This is a completely different approach! Write the authors: “In an average year, approximately 450,000 people engage in daily transactions. While around 20% make commission-free profits in the typical year, the results of our analysis suggest that less than 1% of day traders are able to consistently outperform.” (Italics are mine.) To rephrase that sentence, on average, authors discard 19 out of 20 observations of profitable day traders because they can’t prove that their investment gains came from luck rather than skill.

Game over. When calculated using the same simple percentage approach, the success rates of casino/sports players versus day traders were not 13% to 1%, but 13% to 20%. According to the evidence, day traders were the most likely winners!

Research from another country, another era

But… things get worse.

The day trading research is not based on the United States stock exchange, but on the Taiwan stock exchange. And neither are the current conditions in Taiwan. The authors’ data were compiled from 1992 to 2006.

Leaving aside the question of whether the trading skills of Taiwanese speculators of the previous generation matched those of their modern American counterparts—I wouldn’t be surprised if they did, but one can only guess—the conditions of those two markets are very different. Trade in Taiwan in the 1990s was much more expensive than in the United States today.

The price was not right

Let’s count the ways, starting small. At the time, brokers in Taiwan charged commissions on all stock trades, as did brokerage firms around the world. For preferred customers, the fee was modest at 5 basis points (0.05%) of the transaction price. Since gains and losses for daily trades are calculated on round trips, the total commission paid for such trades was 10 basis points. (Note: The authors included trades that remained open for as long as 5 days in their calculations, so technically the paper measured trades “up to 5 days”.)

Transaction fees charged an additional, higher expense. Although Taiwan did not tax stock purchases, the nation charged 30 basis points for stock sales. This increases the round-trip cost to 40 basis points.

The authors incorporated that 40 basis point expense into their calculations. However, they did not address trading spreads – that is, the gap between the purchase price and the price of a share – because such costs are implicit, being built into share prices. Fortunately, for my purpose, which is to compare the transaction costs of the stock markets in Taiwan in the 1990s and the United States in 2024, the authors measured the average spread over that period: 64 basis points.

Therefore, on average, the day trade cost the subjects in Taiwan 104 basis points. Ten points for commissions, 30 in fees and 64 to cover the spread.

In contrast, US day traders currently pay no commissions, transaction fees and much lower spreads on major stocks. As I write this column, the bid price on Nvidia ( NVDA ) is $119.02, while the ask price is $119.08. The respective prices for Tesla ( TSLA ) are $220.14 and $220.23, while those for Amazon.com ( AMZN ) are $186.31 and $186.65. That means spreads of 5, 4 and 18 basis points respectively. Let’s be conservative and call the average of large companies 15 basis points. That makes the following comparison.

If 20% of Taiwan’s day traders ended up in the black each year, losing 104 basis points of potential earnings, then US speculators today are supposed to be doing better because their house only draws 1/7 of that amount. Of course, this is just an assumption; they may not be as successful as Taiwanese day traders of the last generation, despite their much improved odds. But this possibility would not, as they say, be the right way to bet.

Conclusion

As you might expect from someone scheduled to speak at this year’s Bogleheads Conference, I don’t like day trading. It’s speculation at best and gambling at worst. It also misses the point of investing in stocks, which is to participate in the extraordinary growth in earnings that developed market companies have enjoyed over the past eight decades. (Many companies in emerging markets did even better, but their results were much less consistent.)

However, there are better ways to serve a truth than to propagate a lie.

John Rekenthaler is Vice President of Research at Morningstar. This article originally appeared on our US homepage