10 Reasons Why The Stock Market Won’t Make You Rich

Ever since I was a kid I was fascinated by the stock market. I thought if there was a place a poor kid like me could get rich that was it. I ended up working as a prop trader for a few years and made a good living out of it and I can tell you from first hand experience that the stock market won’t make you rich.

We made money with tons of leverage and ultra fast execution but the average trader/investor is lucky to get 8% minus inflation on his small amount of savings.

The only guys that get rich are rich already or have access to tons of leverage. The guys trying to sell you their trading systems deserve a slow death, they’re the worst kind of frauds. Anyone with a consistent system would be a trillionaire. This article is not designed to be discouraging but to manage your expectations on what to expect from the market. Check it out:

1) Inflation

  • Inflation, otherwise known as the expansion of the money supply will take 3% a year off of your return

2) Capital Gains Taxes

  • Capital gains taxes are taxes applied to any profit you make on an investment/trade
  • Capital gains can range from a percentage of your ordinary income tax bracket all the way to the entirety of your income tax bracket depending on the duration of the investment, your annual income and your country of residence
  • Capital gains taxes will generally take 10% to 50% of your return

3) MER

  • Mutual Funds are a fund composed of stocks picked by an advisor that attempts to beat the S&P 500 in a yearly rate of return
  • The majority of funds underperform the S&P and charge you an MER (Management Expense Ratio) of approximately 2.5% a year for the privilege of  having them mismanaging your money
  • Many funds will also charge you front-end loading fees, back-end loading fees or other miscellaneous fees

4) Trading Fees and Slippage

  • Active trading is the buying and selling of investment products, usually stocks, on a shorter time frame than investing
  • It’s the fastest and easiest way to lose money in the stock market
  • The more often you trade the less likely you are to make money due to trading fees and slippage
  • Slippage is the difference between the price you want and the price you actually get
  • For example, on a volatile stock like AAPL you can place an order to buy 100 shares at $500.00, but you may not be able to get them until $500.75
  • You will usually pay slippage on both side of the transactions

5) Carrying Cost Of Leverage

  • Leverage is the credit extended to you from your brokerage house
  • Unless you’re already wealthy, you won’t be extended very much of it
  • If you are using leverage then you’ll have to pay the carrying cost or interest on this credit

6) Financial Advisors

  • Financial advisors are what are formerly known as stockbrokers
  • They are the frontline salesman for banks/brokerage houses and their job is to manage as much of your money as possible at the highest commission rates
  • They are paid commissions depending on the type of investment they sell you on
  • Many will try to convince you of their market timing and stock picking abilities which they don’t have, if they were consistently right they wouldn’t be advisors

7) You Lack Skill

  • The best investors of the 20th century, Warren Buffett and George Soros, have only averaged a 20% rate of return per year
  • To think you will do better over a 3o to 4o year period is not going to happen
  • Stock picking is gambling and you’re playing against the best in the world, you’ll most likely lose money on the whole

8) Bond Returns Are Usually Worthless

  • Bonds are a loan given to a government or corporation by an investor in exchange for repayment of the loan with interest
  • Government bonds are usually the safest investment vehicle, unfortunately the rate of return on these is so low it will rarely cover your inflation costs, you might as well put your money in a high interest savings account
  • Provincial or corporate bonds will offer slightly higher dividends but are at a higher risk of default, even still most of these will not be enough to cover inflation
  • Junk bonds, or high yield bonds are bonds that pay large dividends, these can offer substantial returns, unfortunately the default risk on these is usually far too high for making a smart investment in
  • With all that said, there are some good medium return bonds (6%) out there but they are few and far between

9) Lack Of Information

  • You as an outside investor will not have anywhere near the depth of information a top-level hedge fund manager does
  • Most of these guys are deep into corporate espionage and have access broker first calls as well as actual to legal and illegal inside information on public companies
  • These guys will get the news way before you do

10) Lack Of OPM

  • Lack of OPM, or Other People’s Money is by far the largest reason why the stock market won’t make you rich
  • Warren Buffett and George Soros made their billions from management fees of OPM reinvested in their funds
  • Large hedge fund managers are nothing more than service providers, they sell the service of superior returns to wealthy individuals looking to become wealthier
  • Without outside investors even the best managers would have made no more than a modest living from investing

What Should You Invest In Instead?

  • If you’re still set on investing your money, the stock market can offer you some decent returns
  • Combined with compound interest, reinvesting profits and doing so through some tax shelter you can make decent money
  • The S&P 500 has earned approximately 8% a year since its inception
  • You can invest in a passively managed index fund which will hold the basket of stocks for its particular benchmark eg. S&P 500
  • These types of funds come with very low MER, usually around 0.3% if  you buy them online
  • This is not an active trading strategy, this is a hold forever strategy
  • If you are prepared to do this you may have to suffer through down decades, this is not for the faint of heart
  1. Hey man, good post.
    It is a very valuable point, that you “dont have anywhere near the depth of information a top level hedge fund manager does” …
    In every business, the ones that knows the most, earns the most.
    I would never go into the stock market, since I know NOTHING compared to professional stock-brokers. I would rather invest my money in something I know about.
    Keep up your good work with your blog.
    – Boy Toy

  2. Thanks BOY TOY, and yes I agree, investing in what you know, namely a business where you have an applicable edge over other people is by far the best option.

  3. Valuable post !! It’s just like a fight between amateurs an pros , we already know who is gonna win

  4. But I agree it is very difficult to make money (on average) in short term or day trading. But long term (10+) stock investments with dollar cost averaging have good returns.

  5. There is some truth to that, but if I were going to go that route I would buy an index fund/etf and dollar cost average on that, you just have to be prepared to hold through down years that can span 7-8 years.

  6. Great post!! Why did you get out of prop trading? Do you think its a good career to pursue for newly grads?

  7. Thanks Jack, i got out because the NYSE moved from a specialist based platform to a hybrid market and I lost my feel for thr market. I couldnt make money for 6 months and they raised trading fees making even trades unprofitable. I would say its not a good career choice, of the 1000s of guys that came through our doors no one I know is still making money.

  8. When were you a prop trader? And where? The best prop traders could make a few million per year at the end of the 90s and the early oughts. Its still possible today but there are way fewer than they used to be.

  9. From about 2003 to 2007. A prop shop in canada and ya our top guys were making over a million. A guy I started with was a millionaire by 22. And ya, way fewer as the exchanges closed a lot of the loopholes and quadrupled their fees for intraday trading. Will have a full article out this year on it.

  10. I’ve always felt like a fool that I’ve never touched the stock market. That video made me feel a thousand times better about not getting involved.

    Turns out I dodged a bullet and didn’t even know it.

    Thanks for the knowledge Will.

  11. Hey will. You mention investing on index funds online. I’m curious in which online platforms you recommend, specially for us foreign investors who don’t have such an easy access to American funds. Thanks man.

  12. Hi Camilo, the index fund I had in mind would be an S&P 500 tracker, I can get that from my bank at a 0.37% MER or an ETF of the S&P like the spyders. Not sure how that works for you if you can’t get american funds. That’s for guys who are committed to investing for whatever reason, but for me I don’t invest at all. My philosophy is to invest in myself and my business where I can get 1000+% return every year, these returns are possible in blogging or a small service business, that’s the path I recommend for most guys. With the cash you can’t afford to invest, use that as emergency/insurance cash in case you have an interruption of income. The exception would be if you’re older, have a thriving business that need no more capital and have a lot of cash, then you can pick up an index fund or a mid yield bond fund, I’d prefer the bond fund as you can live off the interest, index funds you have to hold for 25+ years to cover your bases, ie. you get hit with a down decade which happens

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