Welcome to the end of the week! Just sit back, relax, and enjoy this weeks roundup in another edition of Happy Hour.
Day Trading 3.0
Mobility and the internet of things does a great job of breaking down long-standing barriers, for better or worse. Though, a couple of barriers should probably stay up. The Verge recently reported on one such example.
The story about someone, a high school kid no less, who got lucky day trading penny stocks is enough to convince a few people they can do it too. The falling transaction costs of trading is another excuse to try. The fact trading can now be done anywhere with a cell signal makes it more troubling.
Now, nothing breathes new life into bad investment strategies than a long bull market, 24/7 access, falling costs, and a few sensational success stories. Day trading first popped up with the rise of online discount brokers during the dot-com boom, and later wiped out in the crash.
Then came forex day trading – same money suck, different wrapper – that still exists because if gambling with stocks doesn’t work, currencies will?!
Several years ago, I ran into a DePaul security guard who was convinced currency trading was the answer to his money woes. He didn’t much like my negative take on his grand idea. Sadly, I was right. Forex has been an absolute failure for most at-home traders ever since.
Funny how get rich quick schemes in the stock market only work out for the person selling the idea.
We’ve now reached Day Trading 3.0: The Mobile Version with a new generation of online brokers pushing their wares and the old brokers following suit.
Most of the new brokers are simply second attempts of dot-com failures or repackaged versions of the old brokers built to push the emotional buttons that get so many investors in trouble. Simply, if they don’t loosen your wallet, they promote the bad behavior that shrinks your account.
An argument can be made that higher, not lower transaction costs are more beneficial to investors. Sometimes friction is a good thing. A dollar amount, set fee, and/or minimum holding period acts as a good deterrent to investing mistakes, like chasing returns. These mistakes only get exacerbated in the free, mobile trading direction we’re headed. If a 60 day holding period or $20 per trade keeps me from making dumb mistakes, then it’s worth it.
The other option is to systematize your investment plan so you only make trades and changes when the plan tells you too. Automating the process is better. Only one of the new brokers, Betterment, seems to be interested in helping investors with an automated process, for a small fee. The good news is the growing robo-advisor business is willing to try it too, just be aware of the costs.
I suspect we’ll see more of these day trading “success stories” before the market has its say. Until then, I’ll stick with my old TD Ameritrade accounts. I made a total of four trades this year, which is about par for the course, for a total of $29.97 (one trade was free). And I did it all without my phone.
- The Power of Habit – Seeking Wisdom
- 7 Investment Concepts Fundamental to Value Portfolio Management – Arbor Investment Planner
- Be Smart About Charity – B. Ritholtz
- One of the Most Famous Rules of Investing Might Be Totally Wrong – Bloomberg
- Evergreen Lessons From Buffett And Munger – The Irrelevant Investor
- Lessons From Oil’s Black Friday – J. Zweig
- The Best Inflation Protection – L. Swedroe
- How Our Taxi Article Happened to Undercut the Efficient Market Hypothesis- The Upshot