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February 5, 2021 | And the Street Ran Red

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

American economist Allison Schrager had some interesting things to say about GameStop, Robinhood and the testo-drenched mob over at WallStreetBets on Reddit. People confuse investing with gambling. So maybe they shouldn’t be allowed to own stocks.

“Investing in individual stocks is risky, and most people would be better off owning an index fund. If they did, they’d make more money on average and face less risk at the same time. Day-trading options are even riskier.”

How crazy is it to ban the ownership/trading of individual equities? Just so people don’t blow themselves up?

Well, look what happened to all those young Hoodie turks who believed their digital overlords and jumped into GameStop at $300 a pop. Or four hundred. Or even two hundred. The vast majority were fleeced. Losses are estimated to be in the hundreds of millions.

The GameStop lesson: it’s not a game. So stop.

Poor kiddos. They wanted to get rich fast without working for it (isn’t that called ‘gambling’?) and also bought into the Trumpesque fiction that it was a moral act to punish Wall Street. Of course, the Street won. It always does. And that’s why day traders are usually squished.

Look at the stats. Plain as the nose on your face.

A study in Brazil two years ago found one in three day traders were making bank after a single day of flipping stocks. By day 300, that had dropped to 3% with the other 97% poorer than when they started. The conclusion: the longer people do this, the stupider they get and the bigger their losses.

Another study in Asia lasted 12 years and had a similar result – only 5% of day traders were in the black and two-thirds were consistently in the red. Ditto in the US, where the stats show those who invest, stay invested, get comatose or forget they ever invested, do better than those who trade and try to time markets. In fact, a famous Fidelity analysis showed the best-performing accounts over a decade belonged to dead people. They tend to buy and hold.

Here’s more: over two decades the US stock market advanced close to 600% (a return of over 9% a year), but day traders who missed the 30 best days (out of 5,000 trading sessions) had – incredibly – a negative return. Invariably those good days came after crappy ones, so DIY investors who went to cash to avoid market declines (because they’re smarter than everybody else) usually missed the recoveries. Lesson: stay invested. Be diversified. Stop making financial decisions with your pants.

Adds economist Schrager:

“Owning individual stocks is inefficient for most people. We’d have more money and less risk if we just owned funds, and if we want to encourage more people to invest in the market, that’s what we should aim for. I’m all for democratizing the markets, but for me, that means wider ownership of efficient stock portfolios.”

Of course, Reddit and the Hoodies haven’t democratized finance. They’ve gamified it. Despite the short-term swings in their target stocks (GameStop staunched the bloodletting for a while on Friday), most of them will get played.

Here’s another lesson: during the 2008-10 credit crisis disaster the stock market shed 55% of its value at one point, and took seven years to fully recover. During that time a balanced & diversified portfolio (no individual stocks) lost 20%, recovered in a year, then advanced 17%. So investors who completely ignored the financial markets and played with their dogs instead ended up with an average 5% yearly return. Not shabby.

Anybody can ignore history, data, human experience and the stats, thinking they’re smarter than the herd, and day trade. Anybody can go to r/wallstreetbets, join the rabble and try to profit through market manipulation. We’re all free to get hot stock tips from a BIL, a news feed, stock blog or Twitter. Now with a cutesy trading app, we’re just a swipe and a click away from buying something whose value changes by the minute.

And look at this pathetic blog. Cowboys can’t wait to come on here and tell you how awesome they are because of the stock picks they’ve made. They dangle wins, and get amnesia when it comes to losses. It’s all about competition, superiority and (I’ll say it…) toxic masculinity. As the Hoodies have been posting lately, “we’re gonna get rich or die trying.”

Exactly.

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February 5th, 2021

Posted In: The Greater Fool

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