Retail Bros vs Suits: Why Most Retail Traders Lose Money (and How to Avoid It)

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If you are interested in the stock market, you may have heard of the term “Retail Bros”. This is a slang term for retail traders who are mostly young, male, and aggressive in their trading style. They often follow the advice of Dave Portnoy, a popular online personality and founder of Barstool Sports, who claims that “stocks only go up” and that he is better than the professional investors or “Suits”.

But is this true? Are Retail Bros really smarter than Suits? And why do most retail traders lose money in the stock market?

In this blog post, we will try to answer these questions in one minute, using some surprising statistics and facts from various sources.

First of all, let’s define what we mean by retail traders and professional investors. Retail traders are individual investors who trade stocks or other securities for their own account, usually using online platforms or apps. Professional investors are institutional investors who manage large pools of money for clients, such as mutual funds, hedge funds, pension funds, etc.

According to a study by the University of California¹, most retail traders lose money in the stock market, and only about 1% of them are able to consistently profit net of fees. The study analyzed the trading records of over 400,000 individual accounts from a large discount brokerage firm from 1991 to 2016. The study found that:

• 80% of all day traders quit within the first two years.
• Among all day traders, nearly 40% day trade for only one month. Within three years, only 13% continue to day trade. After five years, only 7% remain.
• Day traders with strong past performance go on to earn strong returns in the future. However, these day traders are very rare - accounting for less than 1% of all day traders.
• Traders with up to a 10 years negative track record continue to trade. This suggests that day traders even continue to trade when they receive a negative signal regarding their ability.

The study also found that retail traders tend to sell winning investments while holding on to their losing investments, a phenomenon known as the disposition effect². This behavior leads to lower returns and higher taxes for retail traders.

On the other hand, professional investors have several advantages over retail traders, such as:

• Access to more information and resources, such as research reports, analysts, data feeds, etc.
• Ability to diversify their portfolio across different asset classes, sectors, regions, etc.
• Ability to hedge their risks using various strategies and instruments, such as options, futures, swaps, etc.
• Ability to exploit market inefficiencies and arbitrage opportunities using sophisticated algorithms and high-frequency trading.
• Ability to leverage their capital and borrow money at lower interest rates.

According to a study by Dalbar³, the average individual investor underperforms a market index by 1.5% per year. Active traders underperform by 6.5% annually.

So why do retail traders still trade despite these disadvantages and poor results? There are several possible explanations, such as:

• Overconfidence: Retail traders may overestimate their own skills and knowledge, and underestimate the difficulty and complexity of the market.
• Illusion of control: Retail traders may believe that they have more control over their outcomes than they actually do, and that they can influence the market with their actions.
• Gamblers’ fallacy: Retail traders may believe that past events affect future events in a predictable way, and that they can spot patterns or trends in random data.
• Confirmation bias: Retail traders may seek out or interpret information that confirms their existing beliefs or hypotheses, and ignore or discount information that contradicts them.
• Herd mentality: Retail traders may follow the crowd or mimic the behavior of others, especially those who are perceived as successful or influential.

One example of herd mentality is the phenomenon of “Retail Bros” following Dave Portnoy’s advice. Dave Portnoy is known for his controversial and provocative statements about the stock market, such as:

• "I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now."⁴
• "There’s nobody who can argue that Warren Buffett is better at the stock market than I am right now. I’m better than he is. That’s a fact."⁵
• "I don’t care about earnings reports. I don’t care about dividends. I don’t care about anything except supply and demand."⁶

Dave Portnoy claims that he has made millions of dollars by trading stocks during the pandemic-induced market crash and recovery in 2020. He also claims that he has inspired millions of followers to join him in his trading journey. He calls his followers “Retail Bros” or “Daves” and encourages them to buy stocks that he likes, such as Tesla, Penn National Gaming, or any stock that has a catchy name or ticker symbol.

However, there is no evidence that Dave Portnoy’s trading strategy is sustainable or profitable in the long run. In fact, there is evidence that his trading style is risky and reckless, and that he has suffered significant losses in the past. For example:

• In 2017, he lost $647,000 in one day by betting on a boxing match between Floyd Mayweather and Conor McGregor⁷.
• In 2019, he lost $40,000 in one day by betting on a horse race.
• In 2020, he lost $700,000 in one day by trading options on Boeing.

Moreover, some of the stocks that Dave Portnoy has promoted or invested in have performed poorly or crashed after his endorsement. For example:

• In June 2020, he bought shares of Hertz, a car rental company that filed for bankruptcy protection. He claimed that he made $200,000 in one day by trading Hertz, but later admitted that he lost $650,000 by holding on to the stock.
• In July 2020, he bought shares of Kodak, a photography company that received a government loan to produce generic drugs. He claimed that he made $100,000 in one day by trading Kodak, but later sold the stock at a loss after the loan was put on hold due to allegations of insider trading.
• In August 2020, he bought shares of Nikola, an electric truck company that was accused of fraud and deception by a short seller. He claimed that he made $500,000 in one day by trading Nikola, but later sold the stock at a loss after the company’s founder resigned amid the scandal.

These examples show that Dave Portnoy’s trading style is not based on sound analysis or logic, but rather on emotions, impulses, and gambles. He may have been lucky or successful in some cases, but he has also been wrong or unlucky in many others. His followers may have followed him blindly or blindly followed him into his trades, but they may have also followed him into his losses.

Therefore, we can conclude that Retail Bros are not smarter than Suits, and that most retail traders lose money in the stock market because they lack a plan, a strategy, and a discipline. They also fall prey to various cognitive biases and psychological traps that impair their judgment and decision making.

If you want to be a successful trader or investor, you need to do your own research, analysis, and due diligence. You need to have a clear goal, a realistic expectation, and a risk management plan. You need to follow the rules and principles of trading and investing, such as:

• Diversify your portfolio across different asset classes, sectors, regions, etc.
• Hedge your risks using various strategies and instruments, such as options, futures, swaps, etc.
• Exploit market inefficiencies and arbitrage opportunities using sophisticated algorithms and high-frequency trading.
• Leverage your capital and borrow money at lower interest rates.
• Sell your winners and cut your losers.
• Don’t chase the market or follow the crowd.
• Don’t let your emotions or ego get in the way of your trading or investing.

And most importantly, don’t listen to Dave Portnoy or any other self-proclaimed guru who claims to have the secret formula or the magic bullet for making money in the stock market. There is no such thing as a free lunch or a sure thing in the market. The only way to succeed is to work hard, learn constantly, and improve continuously.

That’s it for this blog post. I hope you found it informative and helpful. If you did, please share it with your friends and family who may be interested in trading or investing. And if you have any questions or comments, please leave them below. I would love to hear from you.

Thank you for reading and happy trading!

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References:

¹: Barber B.M., Lee Y., Liu Y., Odean T., The Cross Section of Speculator Skill: Evidence from Day Trading (2019)

²: Shefrin H., Statman M., The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence (1985)

³: Dalbar Inc., Quantitative Analysis of Investor Behavior (2020)

⁴: Portnoy D., Twitter Post (2020)

⁵: Portnoy D., Twitter Post (2020)

⁶: Portnoy D., Twitter Post (2020)

⁷: Portnoy D., Twitter Post (2017)

: Portnoy D., Twitter Post (2019)

: Port