But some people claim that fast money (repeated transactions) lead to greater wealth creation, due to their ability to multiple gains repeatedly over a short time. Is this statement truthful?
This is a very common claim in trading circles, and it's crucial to examine it with logic and data.
Let's deconstruct the statement: "Repeated transactions lead to greater wealth creation due to the ability to multiply gains repeatedly over a short time."
Is the Underlying Mathematical Principle Truthful?
Yes. The principle of compounding—where you earn returns on your returns—is the most powerful force in finance. In theory, if you could consistently generate a positive return on a very short time frame and repeatedly compound it, you would achieve astronomical wealth very quickly.
This is the seductive "what if" that draws people in.
Is the Practical Reality of Achieving This Truthful?
No, for the vast majority of people. The statement is a dangerous half-truth because it ignores the fundamental realities of trading:
1. The Myth of Consistent High Success Rates
The claim assumes you can win repeatedly and consistently. Let's do some stark math:
A "Good" Trader's Reality: Assume a very skilled short-term trader has a 60% win rate—which is excellent.
The Law of Large Numbers: Over 100 trades, they win 60 and lose 40.
The Catch: Risk/Reward. To be profitable, their average gain on winners must be larger than their average loss on losers. A common benchmark is a 1:1.5 risk/reward (risk $1 to make $1.50). Maintaining this discipline while chasing fast trades is extremely difficult. Most amateur traders take small profits and let losses run, inverting this essential ratio.
2. The Crushing Weight of Friction Costs
Each "repeated transaction" isn't free. These costs compound against you:
Commissions & Spreads: Even with zero commissions, you always buy at the "ask" and sell at the "bid." This spread is a direct, guaranteed loss on every single round-trip trade.
Slippage: Your order may not fill at the price you see, especially in fast markets.
Taxes (The Biggest Blow): In most jurisdictions, short-term gains are taxed as ordinary income (e.g., 30-50%). Long-term gains have a much lower tax rate (e.g., 0-20%).
Example: Make $100k in short-term trades. Pay $40k in tax. You have $60k to reinvest.
Long-term: Make $100k in one held asset over a year. Pay $20k in tax. You have $80k to reinvest.
This tax drag is a massive, often fatal, headwind for the "fast money" strategy.
3. The Psychological and Logistical Impossibility
Scalability: A strategy that works with $10,000 often breaks down with $1,000,000. Your own orders begin to move the market.
Emotional Compounding: Losses (and even wins) trigger fear and greed. One severe emotional mistake can wipe out months of careful gains. The mental stamina required to execute hundreds of high-stress decisions is superhuman.
Time Commitment: It's a full-time, all-consuming job competing against institutions with colocated servers and teams of PhDs.
A Thought Experiment: The Lottery vs. The Salary
Short-Term Trading (The Lottery): The potential payoff is life-changing. The advertisements highlight the winners. But the expected value for the player is negative. A few get "fast money," the vast majority lose.
Long-Term Investing (The Salary): The payoff is predictable, gradual, and built on a foundation of economic productivity. The expected value is strongly positive over time. It's not glamorous, but it's reliable.
What The Data Shows
Study after study shows that:
The vast majority of day traders lose money. (Often over 80-90% in some markets).
Average investor returns lag market index returns dramatically, primarily due to the costs of frequent trading and poor timing.
The world's most famous long-term investors (Warren Buffett, Peter Lynch) became billionaires by finding great companies and holding them for decades, not by making thousands of trades.
Conclusion
The statement is mathematically tantalizing but practically a mirage.
It's like saying, "Repeatedly betting on black in roulette leads to greater wealth creation, due to the ability to double your money repeatedly over a short time." The math of doubling is sound, but the game's structure (the 0 and 00) guarantees the house—or in trading, the costs, taxes, and human fallibility—wins in the end.
The critical error is confusing frequency of action with probability of success. Long-term investing accepts lower frequency of decision-making to capture a high-probability, positive expected value outcome. Short-term trading seeks high frequency but must overcome insurmountable headwinds, making the probability of sustained success vanishingly small for anyone not running a quantitative hedge fund.
Truth: The ability to multiply gains repeatedly is real. The greater truth: The costs, taxes, and statistical realities make it an almost impossible strategy to execute successfully, turning a beautiful mathematical theory into a wealth-destroying practice for nearly all who attempt it.
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