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When Day Traders Do Well, It’s Probably Just Luck

Research suggests market gains for day traders in recent months owe more to chance than skill

Excerpts:

According to statisticians, however, there’s also little doubt that most of these day traders’ good performance is due to luck. Statisticians over the years have devised a number of sophisticated tests for measuring the relative roles of luck and skill in the investment arena.

Despite their different approaches, they come up with remarkably similar conclusions. when applying his technique to the small subset of managers that traditional performance evaluation finds to have beaten the market, he found that “more than 90% of them did so because of luck.” So even though skill exists, it is rare. In fact, Prof. Cornell says, skill plays so small a role that almost all individual investors should act as though it plays no role whatsoever.

One counterexample that inevitably comes up in discussions about luck and skill among day traders is the performance of Medallion Fund, a hedge fund managed by James Simons of Renaissance Technologies. That fund has been successful over the past three decades by pursuing day-trading strategies, as you can see in the accompanying chart. It is so successful, in fact, that according to Prof. Cornell it would be impossible to attribute it to mere luck.But Mr. Simons is the exception that proves the rule for the rest of us. Prof. Cornell argues that Mr. Simons’s strategy isn’t one that you or I could replicate as individual day traders, since it involves constantly opening and covering thousands of short-term positions. The fund reportedly is right in just barely more than 50% of these trades. But this is still enough that, when replicated over millions of trades, the fund is able to make billions of dollars.

https://www.wsj.com/articles/when-day-traders-do-well-its-probably-just-luck-11596898228?mod=hp_listb_pos1