Few, at least so far, appear to be listening — and that is unfortunate. There is nothing good, and much bad, to be said for day trading in stocks. This will end badly for almost everyone who tries it.
Studies have shown repeatedly that the typical investor has a less than 1 percent chance of beating the market, year in and year out. The increased knowledge of this fact is what has driven the widespread move over the past decade into index funds that replicate such things as the S&P 500.
Yet in the United States, we play down experience and expertise to worship the scrappy, amateur outsider — the person who is going to show the pros how it’s really done. (For reference, see: Trump, Donald; 2016 election). And when it comes to the stock market, Portnoy is Exhibit A.
Portnoy, a sports fanatic who admits he knew nothing about investing mere months ago, is suddenly an online day trading guru despite the fact that his Twitter bio actually says, “Don’t trust anything I say about stocks.” Huge numbers of people watch his livestream, where he trash-talks pros such as Warren Buffett and invests using such methods as picking Scrabble tiles out of a bag and choosing what stocks to buy based on the letter selected. “Today looks like a battle. But remember …..STOCKS ONLY GO UP,” he tweeted on Wednesday as the S&P 500 plunged by several hundred points.
True, options trading was growing in popularity before the novel coronavirus crisis, despite it seeming all but certain that many newbie traders do not understand the level of risk they are taking on. More than half of stock-trading app Robinhood’s new users are first-time traders, according to the company’s data. (These traders included 20-year-old Alexander Kearns, a student at the University of Nebraska who died by suicide this month after misunderstanding his account and believing he owed Robinhood more than $730,000.)
But the explosive growth seen more recently would almost certainly not be occurring without the coronavirus pandemic. One thing that traditionally stopped day traders is that it’s a hard hobby — and make no mistake, that’s what it is — to combine with a 40-hour-a-week job or full-time studies. With the real unemployment rate almost certainly in excess of 20 percent, there are tens of millions of Americans with free time on their hands. At the same time, professional sports — a pastime that would normally consume millions of Americans — is off the table. There is significant evidence that many of the newly minted day traders are, like Portnoy, simply frustrated sports gamblers seeking a new diversion. All this combines with the growth of apps that, like Robinhood, offer commission-free trading, making it seem all but painless to play in the markets.
This confluence of factors creates a perfect storm for uninformed day trading and investor fecklessness. One example: Stocks of companies that file for bankruptcy almost always plunge to near zero, for the common-sense reason they are worthless. But shares in bankrupt rent-a-car giant Hertz, which should be moribund, soared from 56 cents apiece to more than $5 this month, before falling to less than $2.
In the aftermath of the first dot-com boom, a manager for a day-trading shop told Congress that 80 to 90 percent of the business’s customers lost their money and quit within six months. It seems all but certain something similar will occur to day traders 2.0. Portnoy, a multimillionaire entrepreneur, can afford to play at day trading until professional sports and a functioning economy return. That’s hardly true for the vast majority of his followers. As famed investor John Templeton observed in the 1930s, the phrase “this time is different” is often “among the four most costly words in the annals of investing.”
Some things never change.
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