Wall Street makes its money on activity, you make yours on inactivity: Warren Buffett

Warren Buffett once famously said “Wall Street makes its money on activity, you make yours on inactivity”

Let us understand this quote in more detail.

• 76% of National Stock Exchange (NSE’s) total revenue comes from market activity.
• Top brokers in India like Zerodha and Angel One are reporting revenues of 4000 crore and profits in excess of 1000 crore.

How are they making so much money? From trading activity.

All of this, inspite of flashing the mandatory disclosures each time you login – which says 9 out of 10 individual traders lose money in Futures and Options. Those who lose also spend an additional 28% on transaction cost which exchange, broker and government earn.

Trading activity comes from people who are lured into the dream of getting rich quickly by trading in the stock market.

When Buffett says “you make your money on inactivity” he is intending to say – the only way you can earn money and create wealth in the stock market is by buying and holding high quality companies (or any equity fund) for a long period of time.

When transactions reduce, returns increase.

In FnO trading, if one person earns, the other has to lose. The broker and taxes take away a percentage of the gains. The person who loses, also ends up paying transaction costs.

This makes it a losing game for everyone involved except – you guessed it right – the brokers, stock exchange and the government.

Everything except long term investing is a “zero sum game”. Wealth creation only happens when the value of a company increases as it grows its business. If you stay invested during the period when a company is growing – you make heck of a lot of money too.

The problem? It takes time.

How many have the patience? Very few.

The probability of a trader (or even investors) making money has reduced drastically in recent years because the cost of entering and exiting a trade is very low. The holding periods even in the cash segment are short, usually less than 3-6 months.

Try to identify a good quality company with growth triggers and hold it for a few years. It will be life changing.

The best part? There is very little activity. You buy and you hold. You make money. Not them. That’s exactly what Buffett said in that short, but extremely valuable quote.