Dear day traders …
Day trading, that scourge of the dot-com boom, is undergoing a resurgence. Scores of investors are parsing the ins and outs of stocks and options. Many of them appear to be young men, some of whom are following David Portnoy, founder of the popular website Barstool Sports.
But prominent investors, who can rarely agree on anything, are falling over themselves to beg people to cut it out. It’s “a losing proposition,” cautioned Burton Malkiel, author of A Random Walk Down Wall Street, a classic guide to personal investing. “They are just doing stupid things, and, in my opinion, this will end in tears,” billionaire hedge-funder Leon Cooperman told CNBC.
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.
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. 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.
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.
In the aftermath of the first dot-com boom, a manager for a day-trading shop told Congress that 80 percent to 90 percent of the business’ customers lost their money and quit within six months. It seems all but certain something similar will occur to day traders 2.0.
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.”