Can You Get Rich Quickly With Online Trading?

Big Promises

If you’ve done any research on investing, you’ve probably seen one of those ads: a young man is standing in front of a flashy sports car, waves a big bundle of money into the camera, and tells you how he is making thousands of dollars every day. Allegedly he makes all that money by trading online, following simple instructions from an online group. And all that just takes him a couple of minutes of work per week.

But can you really get rich quickly with trading online? Let’s take a look at the data and find out!

S&P 500

The Standard and Poor’s 500, or short S&P 500, is a stock market index tracking 500 large US companies. Why is it interesting to us? Throughout the past few decades it has been one of the best performing indices in the world. So it can serve us to establish some boundaries for what we can realistically expect to make.¹

Let’s take a look at the data from 1992 to 2022. We assume we buy at a random point in time and sell 1 year, 3 years, 5 years, or 10 years later. What would our results have been in the best case, the worst case, and the average case? For the sake of comparability we use annualized returns².

So, Can You Get Rich Quickly With Online Trading?

The numbers outlined above clearly show that in the best case you can make a handsome return over the period of a year or multiple years. But in order to “get rich quick” you need to invest a relatively small sum and turn it into something really big.

So let’s play some numbers. What would your results have been, if you had invested 1’000 USD or 10’000 USD?

Analysis:

• The numbers over a longer period in the market can be quite handsome – but they are not life changing.
• If we are talking about “getting rich quick”, only the numbers for up to three years are interesting to us. Making 12’578 USD over the period of 3 years in the luckiest case is hardly life changing if you already have 10’000 USD. This certainly does not qualify as getting rich quickly.
• On the other hand there is a realistic probability to lose money. Depending on your circumstances this very realistically can be life changing.

Can You Beat The S&P 500?

So the S&P 500 does not offer life changing returns. The next sensible question then is: “Can you outperform the S&P 500?” For this we take a look at Warren Buffet. Buffet is one of the richest men in history, made the vast majority of his money through investing, and is widely considered as one of the greatest investors of all time.

As an article by seekingalpha shows, Buffet struggled to significantly outperform the S&P 500 over a 15 year period.³ I don’t mention this to discredit Buffet – I have nothing but respect for Buffet.⁴ My point merely is if one of the best investors failed to consistently outperform the index, then it’s not reasonable to assume you can do so easily.

But What If Someone Actually Found A Magic Formula To Make Money?

For the sake of an argument let’s assume someone actually finds a magic formula to consistently make big returns in the stock market without significant risk. What would he most likely do with that knowledge?

• He could keep his strategy secret and use it to make as much money as possible.⁵
• He could start his own hedge funds and draw in significant funds. As he handily outperforms everyone out there, he is almost guaranteed to attract a lot of money. So he can charge handsome fees.
• He could try to sell his knowledge to the financial world, e.g. trying to score a well payed job at one of the big investment banks or sell expensive seminars.

The very last thing he probably would do is rent a sports car, withdraw money from his bank to flash it into the camera, and create a mediocre ad to sell you the membership in some social media group. That is literally the worst way to monetize his knowledge.

So if you see an ad like this, it might be because the person cannot make the promised profits himself, he cannot sell the knowledge to professionals, and wealthy people are unwilling to trust him with the management of their money. Could this be a red flag?

Takeaway

There is no easy, guaranteed way to get rich quickly. If someone promises the opposite, be very cautious.

Final Thoughts

There are three ways to get rich quickly in the stock market, that I am aware of:

• Play high risk and get lucky.
• Find a unique opportunity that others don’t see. This is not easy and in a complex system there are no certainties.
• Insider trading – this is illegal in every jurisdiction I am aware of.

Disclaimers

• Past performance is not indicative of future results.
• I do not suggest you invest in the S&P 500 – or any other product – without doing your own research.

1. Looking at past data is not a great predictor for future performance. Yet unfortunately, it is the best information available.
2. Annualized returns allow comparing returns over different periods of time, somewhat similar to annual interest on saving accounts. For a detailed discussion of the concept I recommend this great article: https://www.investopedia.com/terms/a/annualized-rate.asp
3. https://seekingalpha.com/article/4423498-berkshire-hathaway-versus-s-and-p-500-through-years
4. In Buffet’s defense: he significantly outperformed the S&P 500 over a 20 year period and has outperformed the index again after the observed period.
5. The returns of a given strategy get worse if more people are applying it. Why? In essence all strategies are some version of “buy cheap sell expensive”. The more people buy the same product at the same time the higher the demand. Higher demand leads to higher prices. Higher buy prices lead to smaller returns. The same argument applies to selling the said product.