Many people talk to me about trading stocks. They regale me with stories of making a small fortune on penny stock “A” or a couple grand on tech stock “B.” We all like stories about winning. They are fun to listen to and even more fun to tell.
Rare is the person who walks into a party, gathers a group of slightly-tipsy attendees, only to wax eloquent about how he lost half his retirement playing call options on Apple. That’s just a downer.
But the cold reality is that when most amateurs (and even some professionals) try their hand at short-term trading…well…let’s just put it this way…it doesn’t end with “happily ever after.”
Consider the following. A few years ago, a man was sitting in my office having just made close to $200,000 in a $2 stock that had run to $20. On top of all that, it was in his Roth IRA, so it was TAX-FREE! My advice: sell, sell, sell. Of course, he didn’t. Last I looked the stock was trading under a penny. I’ve got lots of similar stories.
The most recent occurred last Monday morning before the market opened. Seeing the futures market in free fall, a gentleman came into the office to see John Woodard (founder of Woodard and Company). He wanted to sit in our conference room and short the market using a fund that moved three times the inverse of the market. Basically, he wanted to make a bet the market would continue down and he wanted to use extreme leverage. The Dow opened on Monday down about 1,000 points and never went lower. Had he carried out his plan, he would have been down 14% as of Thursday’s close. Fortunately, he listened to John Woodard’s advice and did not execute his plan.
So most day traders would say these last ten days have been a dream come true. The Dow dropped 350 points Thursday, August 20, followed by 530 points on Friday. The day-trading prognosticators would have been short. Then on Monday morning with the Dow down 1,000 points, these gurus would have bought stocks like crazy, only to sell them three hours later as the Dow rallied 800 points. Then short again as the Dow finished down almost 600. Short again on Tuesday (Dow down 200), before going long on Wednesday and Thursday (Dow up 620 and 370 respectively). These traders claim to love volatility for the opportunities it presents. But good luck in consistently getting it right.
I actually tried “playing the markets” once back in 1997, before I joined Woodard and Company. I turned $5,000 into $8,000 in a month. “This is easy,” I thought. “I should quit my job.” By now, you know the rest of the story. Over the next two months, I traded away all my profits and about $2,000 of my principal before moving on to something “harder” – buying quality and diversifying for the long run.
So my advice to all those considering making some quick cash in the stock market: don’t quit your day job.