Are you trading stocks? If so, you're in good company. Grammy-winning saxophonist Kenny Gorelick told Reuters that, over the past decade, he's made about as much trading stocks as he has selling music.
How frequently he trades isn't made clear in the article. Rather, it paints the picture of an interested former accounting major who struck it rich buying into Starbucks pre-IPO and who now starts each morning watching the ticker feeds.
Turning sour notes into a sweet melody
There's much to like about Gorelick's story. For one thing, he's taking control of his financial destiny at a time when the music business is struggling with new distribution mechanisms. According to data from the Recording Industry Association of America, streaming music from the likes of Spotify and Pandora Media (NYSE:P) accounted for 21% of industry revenue last year. At the same time, CD and download sales declined 13% and 15%, respectively, according to Nielsen SoundScan.
"Most people in the music business don't make as much money as we used to," Gorelick told Reuters. He counts himself among that group despite releasing a top 10-selling jazz album just four years ago. Trading supplements income he might have earned on tour or in the studio 20 years ago.
Bad money advice is bad, no matter how good it sounds
So if it works for Kenny G, shouldn't you also be trading stocks actively? I'm afraid not. Research shows that active stock traders don't do as well as buy-to-hold investors. In one case, a real-world study of day-trading activity found that 80% of participants lost money.
Of course, you don't have to be a day trader to forgo serious profits. A study of his various trades at Motley Fool Stock Advisor -- our signature service and one of the best-performing investing newsletters of the past decade -- revealed that Fool co-founder David Gardner would have improved his average performance by better than 50 percentage points per pick had he never sold.
The message? Switching into and out of positions too quickly can cost you more than you might think. Here are four more reasons why you might not want to base your strategy on Kenny G's trading system:
1. Kenny G has WAY more money than you. Unlike buy-to-hold investing, in which a few bucks and an account at ShareBuilder will allow you to build positions on the cheap, day traders employ huge swaths of capital to turn a quick $0.05 profit into hundreds or even thousands of bankable dollars. Kenny G is rich enough to afford that sort of bet. Can you say the same?
2. Transaction costs mean you have to be right way too often. Brokers need to make money somehow, which is why every trade carries a commission. Frequent trading can cost hundreds or even thousands in annual fees, creating pressure to make crazy bets in hopes of landing a huge score.
3. So much can go wrong in a few microseconds, and you aren't faster than a computer. Think of the various innovations in high-frequency trading and the flash crashes we've seen. If day trading requires getting into and out of positions in a few minutes -- at most! -- and the market can fall apart that fast or faster, aren't you all but guaranteed to get wiped out at some point?
4. Don't you want a life? Day trading means spending hours on end staring at screens and analyzing data, all in pursuit of a tiny opening that could close in microseconds. You can and should do better, especially when doctors say that sitting is the new smoking.
We don't know how much Gorelick day trades. All we know is that he's active, and that alone can have consequences that -- by the sounds of the Reuters article -- he has largely managed to avoid. There are good reasons for that, I think, which I'll get into next week in a follow-up article profiling what I see as his better money habits.
See you then. In the meantime, if you want to be more like Kenny G, log out of the trading software, shut off the computer, and pick up a saxophone.You'll keep more of your money and have a little fun along the way.