Overconfidence, and the cost of doing something
Every trade costs a spread, a commission and possibly tax. Activity feels like work. It is mostly a fee.
Understand why doing less is usually the higher-skill move.
How Overconfidence works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
What a 2% fee costs over thirty years
Both lines earn the same 8%. One pays 0.07% a year, the other pays 2%. The gap is not a rounding error, it is most of the point of the exercise.
- 1
Frequent traders reliably underperform
The finding replicates across markets and decades: the accounts that trade most earn least, and the gap is roughly the size of the costs they incur. They are not unlucky. They are paying for the privilege of being busy.
- 2
The costs are invisible, which is why they are tolerated
The commission is on the statement. The bid-ask spread is not, and in anything illiquid it dwarfs the commission. Tax on realised gains is a third leak. None of it appears as a loss, and all of it compounds.
'Commission free' does not mean free. It means the fee has been moved somewhere you cannot see it.
- 3
Overconfidence is the engine
Most people rate themselves above-average investors, which is arithmetically impossible. Confidence produces conviction, conviction produces trades, and trades produce costs, whether or not the conviction was justified.
- 4
So make doing nothing the default
Set a review schedule, act only on it, and require a written reason for every trade. The ability to do nothing on purpose is the rarest and most valuable skill in the whole discipline.
You know how many trades you made last year, and what they cost you in total.
Read next
Every trade costs a spread, a commission and possibly tax. Activity feels like work. It is mostly a fee.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.