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Would it be smarter to invest time and money in day-trading or long-term investing?

Long-term investing. Day-trading isn't even investing, it is speculating.

Trading is based on the idea that we can see the future, and predict the future, from certain indicators.

The academic evidence suggests otherwise. The evidence shows 98% of traders fail to beat the market long-term. Moreover, the evidence suggests you can’t know when markets will go down:

Joseph Davis,Roger Aliaga-Díaz and Charles J. Thomas did a paper for Vanguard, which I have put a link to in the bottom of this article. In full they looked at these factors, and whether they can help us predict the future of the futures:


Price/earnings ratios, or P/Es

1.Components of a simple “building block” dividend growth model (dividend yield + earnings growth)

3. Trailing 1-year dividend yield.

4. Trend of real corporate earnings growth (trailing 10-year average real earnings, or “E10”).

5. “Consensus” expected real earnings growth (proxied by trailing 3-year average growth rate).


Economic fundamentals

  1. Trend of U.S. real GDP growth (trailing 10-year average growth rate).

  2. “Consensus” expected real GDP growth (proxied by trailing 3-year average growth rate).

  3. Yield of the 10-year U.S. Treasury note (reflects inflation expectations and anticipated Fed policy).

  4. Federal government debt/GDP ratio. (Hypothesis: Higher debt levels today imply a lower future return.)

  5. Corporate profits as a percentage of GDP. (Hypothesis: Higher profit margins today imply a lower future return.)

Common multi-variable valuation models

  1. Fed Model: the spread between U.S. stock earnings yield and the long-term government bond yield (the spread between the inverse of P/E1 and the level of the 10-year Treasury yield).

  2. Building-block model with trend growth (a combination of 3 and 4 above).

  3. Building-block model with consensus growth (a combination of 3 and 5 above).




Here are the findings:


1..First, stock returns are essentially unpredictable at short horizons.

The highest correlation—an R2 of just 0.12—was produced by the building-block model using trailing dividend yield and trend real earnings growth.


2. Many commonly cited signals have had very weak and erratic correlations with realized future returns even at long investment horizons.


3. They also found, to the surprise of some readers I’m sure, “that some widely cited economic variables displayed an unexpected, counterintuitive correlation with future returns. The ratio of govern- ment debt to GDP is an example: Although its R2makes it seem a better performer than others, the reason is actually opposite to what one would expect—the government debt/GDP ratio has had a positive relationship with the long-term realized return. In other words, higher government debt levels have been associated with higher future stock returns, at least in the United States since 1926″.


4. The biggest indicators were the P/E ratios, which looks at how expensive a company is related to their current market price. Government debt to GDP AND treasury yields have close to a 0% correlation. I put the and in capitals, as so much has been made about US Treasury Yields hitting 3% on CNBC and Bloomberg recently.

You will notice the formatting of this blog hasn’t been perfect and I after 1-2 tries to change the bullet points, I stopped trying. It proves a point really. Flash marketing won’t change the facts and the academic evidence about investing!

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