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Share trading is the new addiction

These are nerve-racking times for investors, with stock markets bouncing all over the place. We were euphoric when the ASX hit 7,162 on 20 February 2020, but that emotion was short lived as it plunged to 4,546 just four weeks later.

Of course, there were headlines galore proclaiming how many billions had been wiped off our wealth, and many retirees went into panic mode. My inbox was flooded with emails asking whether to sell now and then come back in when the market had turned. Or in more extreme cases, put all superannuation into cash and then “enjoy a risk-free retirement” for the rest of their lives.

I reiterated what I have been saying for years: picking the top and bottom of markets is impossible, and the only sensible way to handle the current volatility is to take a long-term view and hang in there.

From the low day, the ASX went steadily upwards till it hit 6,148 on 10 June -  that was a rise of 36% in just 10 weeks. Since then it’s been moving more down than up, and now we are seeing a flood of headlines indicating a second crash may be upon us. Who knows? As far as I’m concerned, it’s all too difficult, and I continue to look at my portfolio on a long-term basis.

Rise of gambling-trading is a big worry

But what concerns me enormously is the rise of gambling in our community. We are bombarded with gambling advertisements, even in prime time when young people are watching, and statistics show that stock market trading has exploded during the COVID-19 lockdowns. Graham Hand has written about this in detail. One newspaper carried a two-page feature on the new breed of share traders, quoting one exclaiming, “This is not right – it should not be this easy.” In the US, the number of active trading accounts has increased by 70%, helped by the popular trading app, Robinhood, which is offering zero commission on trades. 

And that’s the problem: it is all too easy. You just pick a stock, noticing it’s up $0.30 today then down $0.30 tomorrow and that pattern keeps repeating. You tell yourself that there’s nothing to it. Sell high, buy low and make a fortune.

Well, there is no such thing as a free lunch. The problem with trading like this is that it is essentially gambling, and it’s highly addictive. Psychologists claim the hit the person gets from a successful share trade, or even a great golf shot, is remarkably similar to the hit from injecting drugs.

Let me share a first-hand experience

It’s been a volatile year, and early in May when I was talking to my stockbroker, I told him I was intrigued by the ups and downs happening with such boring regularity, and thought maybe I should have a part of the action. Having watched the NAB share price rise for weeks, I sold 5,525 shares at $16.38. I figured I had a good hedge as a large part of my super fund is invested in the index.

Jackpot. Eight days later, NAB had fallen to $15.50 and I bought 5,775 back and I was ahead. Then 14 days later, I sold that holding for $16.42 and was congratulating myself for making some easy money. But you guessed it, the next movement was up ever upwards and at date of writing, NAB is sitting at $18.67. Yes, my index funds rose, but they would have done that anyway. My first venture and last venture at trading cost me over $10,000.

(It’s true - it was my first go at trading at the tender age of 80. I thought that up-and-down would keep on going. It’s like the racehorse system I invented about 40 years ago which is almost foolproof. I found that horse number two wins one in six races but there would be win, loss, loss, win, win, loss, loss, win and usually a win followed one or two losses and then there was a gap. So the trick was to look for a win and then start to bet. The trouble was you had to use a staking system to recover previous losses. Which meant you are betting increasing amounts of money, and about once every three years, a win was followed by another long run of losses which took all your money.

That was a long time ago. A professor of mathematics told me my system was nonsense because each race is a separate event).

Charlie Munger, Warren Buffett’s business partner, summed it up perfectly when he said:

“In the modern world people are trying to teach you to come in and trade actively in stocks. Well I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin.”

He is spot on. A major benefit of shares is their unique ability to be bought and sold quickly in small parcels. But this benefit is also their biggest drawback. It encourages people who should never get near the share market to start to use it as a casino. Just last week, Forbes reported that a 20-year-old from Illinois had committed suicide when his account went US$750,000 into the red.

And to make matters worse, all this gambling is contributing to the volatility.

Trading is not investing

I understand we are living in uncertain times. But anybody serious about keeping their finances in good shape needs to understand the difference between investing and trading. Investors take a long-term view and do not try to catch a rising or falling market. Traders are like people who hunt day-to-day and many finish up dying of starvation.

American economist Paul Samuelson put it simply:

"Investing should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas."

 

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. See noelwhittaker.com.au. This article is general information and does not consider the circmstances of any investor.

18 Comments
Terry
July 01, 2020

Short term trading can be worthwhile. Take your profits, have a discipline and don't be greedy. Remember, you haven't made any money until you have sold.

Jan X
July 01, 2020

Thanks, Chris, for the Buffett quote: " it's very hard to make money in something when it's popular." However, in this crazy market someone is making money but I suspect it's the big players with millions to buy and sell at one time. Retail investors (not traders) have to be more considered in what they buy and sell. The upcoming reporting season will be interesting.

doug
June 30, 2020

the bottom line of all this, is what you have got or what you havnt got. at the end of the day, when that fellow up top calls . as we all know, you cant take it with you.

Ivaylo Vasilev
June 26, 2020

Google this:
Wall Street suits are mad at me. I don't care, I'm beating them like a drum: Barstool Sports founder

Dee
June 25, 2020

Sell one day, buy the same thing the next day ... wash sale or trading?

Dean Tipping
June 25, 2020

Day trade at your peril for mine. Can the proponents put forward just 1 person who has obtained a track record in performance and wealth accumulation to rival Messrs Buffett, Munger and Peter Lynch, to name but a few. It's like catching barramundi or playing golf for a living, if it were that easy everyone would be doing it. The only addiction worth pursuing in Noel's article is hitting great golf shots.

Derek
June 25, 2020

Share trading has its place and for some has become a necessity in the light of dwindling income from bonds and shares. Clearly it's not easy to turn a profit in share trading. It's widely reported that 90% of share traders lose money so anybody trading really needs to know what they doing if they are going to be successful. Psychology, money management and methodology are the main considerations. Get any these wrong and you'll most likely lose money.
If people treat share trading like gambling then they have gone in with completely the wrong mindset. Share trading should be treated purely as an intellectual exercise with the goal of making a realistic profit. The methodology employed should be easy to understand and the dollar amounts traded small enough to stay in the game.

Sunjay
June 25, 2020

It is easy if you know what you are doing.

Rachel
June 25, 2020

Even my 14 year old asked why don’t I do day trading because I could “make a lot of money”? I wanted to smack him over the head! I didn’t of course but tried my best to explain why that was a bad idea.

Lyn
June 25, 2020

Rachel, wonderful for a 14yr old to show interest, wish mine had. ASX has free training modules online, even a game to pretend, also a Schools version so can't all be bad. He may save all his pocket money to invest at legal age & be a budding Buffett, at worst his number skills will be off the scale for numeric gymnastics he'd have to employ in the game. There should be more like yours. Nothing personal meant, just thrilled to read of such a 14yr old., made my day.

Lyn
June 25, 2020

Noel, I'm surprised at you! I'd love to have been a fly on your wall when you dipped your toes, bless you! Why would you admit a first effort by putting eggs all in one basket defying that golden rule? if you put $90,000 (from your figures) all in one stock at one time and not over say 5 x Lots of $18,000 in same stock & then move on different Lots at different times as prices indicate at a timepoint, or even 5 Lots of S18,000 over 3-4 different stocks then you weren't hedging. That way you would have had buffer on 5 x same or 3-5 x other stock Lots on varying days, sell 1 Lot when shows profit that suits & ride out others for when it comes again or sit it out with small lots til a rise by small amounts. Depending on circumstances ( C.gain/loss that yr) sometimes pays to sell only the number of shares equalling the profit on Lot to take profit out despite proportionately higher fee/share, brings capital back to initial investment to sit it out again, meanwhile enjoying fun or a treat on small gain already in bank & wait for next small Lot to yield up some more treats one might otherwise not afford. It beats sitting about doing nothing all day if one feels able enough to follow the market but not take stupid risks with large amounts. It's known some have "numeric brains" for wont of a better term & numeric exercise of the market keeps me on the ball, interested and stimulated in retirement & keeping funds either on or off market over 20years is a longterm view to some when one also reads relevant annual financials as they arrive to enhance subsequent decision-making. 

SB
June 24, 2020

A fool and their money are soon parted....

Richard Brannelly
June 24, 2020

I fear for them all - especially those who needlessly sucked $10,000 from the hands of the professional super fund managers and are now rolling the dice with said money? The long-term harm can only be guessed at!

Jan X
June 24, 2020

Having all these inexperienced people trading shares is upsetting the market-- very unsettling for long-term investors. There will be tears, I am sure.

Chris
June 26, 2020

Only tears of laughter from me as they all get slaughtered over it. This current crop of “investors” (cough, speculators) think that they are utterly bulletproof and are unknowingly being lulled by a false sense of security (sic) from the so-called ‘easy money’ that they all very aggressively claiming to be making right now within the various reddit forums. Their opinion towards anyone who likes the buy and hold, slow and steady ETFs, low MERs or low double digit returns is equally as hostile.

Outlandish claims about particular trades that will be “going to the moon” just adds to this, along with their belief that pulling 10 grand from their super and trading it just goes to show how much smarter they are than the fund managers who actually do this for a living. I think it will end very badly for them but I can't say I will be sad.

Peter Thornhill
June 24, 2020

With you 100% Noel

Martin
June 27, 2020

Hi Peter,

If I remember correctly, I recall you saying that you get down on your knees every night and pray for another GFC as it provides (provided) you with the opportunity to make a fortune out of buying stocks when the price is down. I expect that what we're seeing now is the result of many people reading such tales, and instead of seeing economic doom and gloom, seeing the opportunity of a decade to buy in when the market has crashed.

Sure, we don't know (and neither do they) whether the market bottomed on March 23, so we also don't know yet whether the professionals sitting on the side will be right/wrong, and whether the amateurs will make money or lose it. (Probably lose it, since unlike your CBA shares bought in 2008 which you held, we're currently seeing a lot of short-term trading). Nevertheless, the fact is that market participation is at an all-time high, thanks mainly to the Internet both disseminating financial information and making it exceptionally easy to participate. I believe that having been shown (educated) for the last ten years on how the sharemarket is not dangerous and recovers from crashes like the GFC and continues to provide income, we're now seeing a completely logical (perhaps not rational) reaction to the Covid crash in the form of masses of people wanting to take advantage of what they see as an opportunity, and, ironically, 'perfect timing' to buy shares! :)

Chris
June 30, 2020

I doubt that the masses of people are really that smart, that they have had such an epiphany. It's more like "they're bored and haven't got anything to do", and that they can suddenly take out $20k from their superannuation. Hence the reason why markets (esp. the US) are relatively expensive right now, and especially on this next raft of corporate news in reporting season. A lot of companies are going to get punished, I think.

Like Buffett himself said - it's very hard to make money in something when it's popular.

 

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