| Common Sense Investing
When I was 15, I went camping with the scouts in Utah’s High Uintah mountains. On arrival, a few of us dropped our gear and ran immediately to the lake to fish. That evening we caught something on almost every cast and soon had our limit. Entering camp with tales of our incredible fishing prowess, our scoutmaster said, “Everyone is a master fisherman when the fish are biting.” The very next day on the same lake we caught nothing.
One type of investor that has caught my interest over the years is known as a “Day-Trader.” These individuals buy and sell stocks quickly in hopes of a daily profit, usually going back to 100% cash at the end of each day. It is a high-risk activity that evidence shows most eventually lose money at. The risk is increased because traders may overstate their own investment abilities when in reality, temporary market conditions may have more to do with their success.
Day-trading became popular in the late 1990s when computers and the internet provided the technology to make it universally available. I remember stories of fortunes being made by day-traders who felt like they had unlocked the key to rapid wealth. What many traders conveniently overlooked was that from 1995 to 1999, both the Dow and Nasdaq indexes grew at double-digit annual rates. It was a time of such robust economic growth that all but the unluckiest of investors were making money. In many cases, the success of the day-traders was more a product of the markets than their own personal investing genius. You might say they just happened to have lines in the water when the fish were biting. Using leverage, as they often did, magnified the results. When the crash of 2000 came along, the same leverage worked against them and the day traders seemed to go away for a time.
Then in about 2005-2006 a new form of day-trader arrived. The real estate market was booming and suddenly it appeared everyone had become a real estate expert and was “flipping” homes for quick profits. The stories of mostly young people becoming wealthy overnight abounded. Then without warning, on a fateful October day in 2007, it all came crashing down. Short-term real estate experts were left bankrupt as their homes were foreclosed on.
In about 2017 more marvelous stories of market conquests began to hit the internet from a new generation of successful day-traders. This time around even their proud parents would tell me how their genius child had quit their job and was making a substantial living by day trading. Failing to recognize they are once again a product of a strong upward market, I expect the day to come when the “fish stop biting,” as always happens, and the once-great day-traders fade again into obscurity. I discourage day-trading but if you are one of them, at least be smarter than prior generations and tuck away some of those slippery profits while you still have them.
Dan Wyson, CFP® is author of “The Gold Egg,” and “21 Financial Myths” and owner of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 – 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor.