Oil Stock Trading: This Is Going To End Poorly

Last month, the Wall Street Journal put out an article titled “The New Oil Traders: Moms and Millennials” that chronicled the daily experience for stay-at-home moms and people in the 18-35 age range that log into their account each day and make trades on the price of oil.

Assuming it can be done, the transaction and social costs are extremely high: These people are paying $20 per day, sometimes more, to make oil and oil stock trades. Assuming that they are entering and exiting their positions 5 times (e.g. ten fees for a round-trip transaction), then we are talking about a hobby that costs $5,200 per year.

To get the fee under $1,000 per year, and assuming $10 per trade, these people can only afford to make one trade per week. Which, considering they use E&P companies, oil itself, and the integrated oil stocks to make their trades, there is no way that they are going to limit their trades to this amount.

And, if you assume that they bring $10,000 to their investment table, they must net $2,000 in trading profits just to earn a 10% return net of their trading fees. And this $1,000 profit would still be subject to short-term capital gains tax rates, which are taxed at the same rate as ordinary income, and can range from 10% to 39.6% depending on your bracket.

Plus, all of this ignores the social costs associated with oil trading. You get what, five thousand days of your physical prime in life, maybe a few thousand more if you take good care of yourself by monitoring your diet, exercise, and stress levels? If you spend 10 hours per week trading, you’re giving up 21 days of that prime per year for each year that you practice the trading activity.

There is no specific data that measures the results of short-term traders from the non-professional class. But we do have the Dalbar study that demonstrated investors earned returns of slightly more than 3% from 1992 through 2012 while the S&P 500 delivered nearly 10% returns. If that data set, plus our common sense, is our guide: we can probably assume that there aren’t too many (any?) stay at home parents and college kids that are building real, sustainable wealth from the result of their trading activies.

The transaction and tax costs are high, the ability to generate meaningful returns is low, and the social costs are also extreme compared to what you’re likely to get in exchange. Plus, there is the stress level of having to figure out how Brexit, terrorist attacks, and government oil inventories are going to affect oil prices on a daily basis. I can think of very few tasks that are harder to accomplish than trying to guess in advance what short term events will happen as well as how other people will react to them.

Of course, there is a better way. Someone could visit the Computershare website and commit to investing $300 per month into shares of ExxonMobil and build up a large cash-generating asset from one of the most well-run companies in the history of the world.

If someone committed to that plan over the past ten years, and reinvested every single dividend back into shares of ExxonMobil, they would be sitting on 597 shares of XOM stock that would be paying out $1,788 per year in dividends.

At that point, you’d be funding a good chunk of future growth just by blowing those ExxonMobil dividends back into more shares of stock. On average, your $300 contribution to Exxon would be matched by a $149 per month investment into Exxon that would be passively generated by the holding itself. Sometime in the 2020s, your Exxon shares would be funded more by the reinvestment of XOM dividends than your own fresh cash contributions. It would be a nearly mindless act that would generate extremely lucrative results compared to the required effort that was necessary to create it.

Originally posted 2016-06-29 15:51:07.

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