The Most Profitable Lie in Finance

Sydney, Goldman offices, a decade or so ago. I’m sitting across a table from a client worth more than half of the companies listed on the ASX.

We’re walking him through a structure that caps the downside on a very large equity holding, and gives up a slice of his upside to pay for it. On the term sheet it’s called downside protection. Down the hallway, the same basic idea gets sold as yield enhancement. Elsewhere again it’s a portfolio overlay, or a hedging programme, or simply risk management.

Nobody in that room said the word gambling. The thought didn’t even enter anyone’s head. And the instruments we were discussing were options.

That same month, somewhere in the world, a schoolteacher asked her financial adviser whether she ought to learn about options. She was told, kindly but firmly, that those things are speculative. Dangerous. A bit like gambling. Only the domain of professionals, or degens.

Same instrument. Same mechanics. Two completely different words.

I spent three decades inside that machine, at Goldman Sachs and then at Citi, and it took me an embarrassingly long time to notice the pattern.

The vocabulary was never actually describing the trade. It was describing who collects the fee.

The Words Are Doing a Job

“Trading is gambling” sounds like a warning, or a nugget of wisdom. But it isn’t. It’s just a fence.

Fences are useful things if you own a field. And the field in this conversation is an enormous pile of other people’s money, sitting in funds and wrappers and plans and products, quietly paying percentage points every single year to somebody who is very keen for that money to stay exactly where it is.

I want to be fair about this, because there is no mahogany table in a dimly lit boardroom with people plotting around it. Most advisers I’ve met are lovely, decent human beings, and they believe what they’re telling you. That’s precisely what makes the myth so durable. You don’t need a conspiracy when the incentives do all the work by themselves. Say the thing that keeps the assets parked, and you get paid. Say the thing that sends the client off to learn a skill, and maybe you don’t.

Language follows the money.

Two Dictionaries

Once you start listening for it, you can’t stop hearing it. The same behaviour gets a different name depending on which side of the fee you’re standing on.

When an institution sells volatility, it’s harvesting a risk premium. When you do it, you’re picking up pennies in front of a steamroller.

When a fund buys puts, that’s portfolio insurance. When you buy them, you’re speculating on a crash.

When a pension fund shifts its allocation, that’s disciplined rebalancing. When you do it, you’re trying to time the market.

When a hedge fund runs 3x leverage, it’s running a sophisticated strategy. When you put on a defined risk spread with the maximum loss known upfront, that’s gambling. Supposedly.

Look at that last one for a second, because it’s the one that gives the game away. The retail version is the trade with the smaller, known, capped downside. And it’s the one that gets called gambling.

Follow the Fee

Here’s the part you won’t find anywhere on the brochure.

Say you’ve got a portfolio compounding at 7% nominal a year for thirty years. $10,000 becomes about $76,100.

Now charge that portfolio 1% a year. It compounds at 6% instead, and your $10,000 becomes $57,400.

That single percentage point, the one that looks like a rounding error on your statement, has taken nearly a quarter of everything you built. Not a quarter of the fee. A quarter of the wealth.

Make it 2% all in, which is not at all unusual once you count the layers, and you finish at $43,200. You’ve handed over about 43% of your terminal wealth for the privilege of never learning.

You’ve never seen those numbers in a marketing deck, have you?

And that fee comes out whether the year was good or bad. In a lost decade, and I think we’re squinting at one right now, the charge keeps landing while the returns don’t. Current valuation equals future gravity for returns, and gravity has never waived its management fee.

The Other Lie, Sold to the Other Half

If the story stopped there it would be too tidy. And you should always be sceptical of tidy stories.

There’s a second industry making very good money from the exact opposite lie.

While the fund business tells you trading is gambling so you’ll stay put, the guru business tells you it’s easy, so you’ll jump in. Lamborghini thumbnails. Private jets. Systems that win ninety percent of the time. Black boxes on a monthly subscription. Some bloke who parked a rented supercar outside the donut shop he used to work in, selling signals to people who cannot afford to lose the money.

Two lies, aimed at two different people, both hugely profitable.

And they feed each other. Every retail trader who blows himself up chasing the second lie becomes a walking billboard for the first. See? Gambling. Stay in the managed fund.

What both lies do, and this is the actual point of all this, is keep you out of the boring middle. That unglamorous stretch of ground where somebody learns a defined risk method, sizes positions properly, takes small losses without drama, and lets a modest edge compound over hundreds of trades. Nobody’s filmed a documentary about that. It doesn’t photograph well. But it works.

Why the Lies Feel True

Here’s the uncomfortable part, and I’d be doing you a disservice if I skipped it.

The myth survives because it is mostly right about most people.

Depending on whose study you pick up, somewhere between 70% and 90% of retail traders lose money over time. And you don’t have to take my word for it. When European regulators forced brokers to publish the numbers, they found that between 74% and 89% of retail CFD accounts lose money. ASIC found 68% of Australian retail CFD investors lost money in the 2024 financial year, more than $458 million of it, including $73 million in fees.

And when researchers at the University of São Paulo followed every single individual who started day trading Brazilian equity futures between 2013 and 2015, they found that 97% of those who persisted beyond 300 days lost money. Only 1.1% earned more than the Brazilian minimum wage. A separate study of roughly 450,000 Taiwanese day traders found that fewer than 1% earned reliable profits net of fees.

Every one of those numbers came from a regulator or a university.

So when your brother in law tells you “trading is gambling”, he isn’t lying to you. He’s just describing what he did.

The sneaky part is the leap from “most people gamble” to “it is gambling”. It’s like watching a room full of untrained 17 year olds fail their driving test and concluding that driving is impossible. You’re watching what happens when people start driving without first being taught how to drive.

Options aren’t dangerous because they’re leveraged, and they aren’t dangerous because they’re complex. They’re dangerous because they amplify the characteristics of whoever is using them. Hand them to somebody with no process and you’ll get precisely what you’d expect. Hand them to somebody with defined risk and a written plan that they follow religiously, and they become the cleanest tool in the toolbox.

The Question That Clarifies It

I’m not asking you to take my word for any of this. I’d rather give you something more useful than an opinion. So here is one question to carry around with you.

“Who gets paid if I believe this?”

It’s not an accusation, because most of the time the person telling you options trading is dangerous just doesn’t know any better. They genuinely believe it. They were taught it, the same way you probably were. But it’s worth noticing when the advice you’re given happens to line up neatly with how the person giving it is getting paid. Listen to them, and then go and get a second opinion from somebody who doesn’t have a horse in the race.

And if you’re the schoolteacher in this story, I want to say something to you directly.

You were not being naive. You asked a sensible question, and you got an answer from somebody you had every reason to trust. It’s what happens to nearly everybody.

The billionaire in that Sydney meeting wasn’t cleverer than you. I’ve met a great many very wealthy people over thirty years, and I can promise you their edge is rarely IQ. The real difference was that somebody sat down with him and explained, slowly and in plain English, what the options were actually doing and exactly where the risk sat. Probably nobody ever did that for you.

And therein lies the gap. Not intelligence, or money, or some talent you were born without. An explanation that nobody bothered to give you. Which is good news, because explanations can be got.

Risking money, hoping you get lucky because you know the odds are against you, can cost you a bad night.

Paying fees every year for thirty years so that you never have to learn how to develop an edge and manage risk? That costs you roughly a quarter of everything you build.

One of those gets called gambling. The other gets called sound financial advice.

Trade safe.

P/S. This piece follows on from my June article Why Trading Isn’t Gambling.

Frequently Asked Questions

So is options trading gambling or not?

It depends entirely on how it’s done, which is the whole point. A defined risk trade with a known maximum loss, a written plan and sensible position sizing is not a gamble. Buying a lottery ticket of an option because somebody on the internet said it would run is. The instrument doesn’t decide that. The person using it does.

If 70% to 90% of retail traders lose, why would I be different?

You wouldn’t be, if you did what they did. Almost all of those losses come from people trading with no method, no risk limit and no plan. The statistic describes untrained people, not the activity. The honest answer is that you become different by being trained, sized properly and patient, and if you’re not willing to do that, the statistic will apply to you too.

Is a 1% fee really that expensive?

Over thirty years, yes. On a portfolio compounding at 7%, a 1% annual fee takes roughly a quarter of your final wealth, and 2% takes about 43%. It doesn’t feel like much on a quarterly statement because it’s charged on the balance, not on the gain, and it comes out in bad years as well as good ones.

Does this mean I should fire my financial adviser?

No, and that isn’t what I’m arguing. Plenty of people are well served by an adviser, and plenty of advisers are excellent. What I’m arguing is that you should notice when advice happens to line up with how the person giving it gets paid, and that you should be free to learn a skill if you want to. Those two things can both be true.

How do I tell real education from a guru selling a dream?

Look at what’s being promised. Anyone guaranteeing a win rate, showing you a supercar, or selling signals without teaching you why the trade works is selling the second lie. Real education is unglamorous. It teaches you risk first, it shows you losing trades as well as winning ones, and it expects you to do the work.