The Wall Street Journal had a recent story detailing the trend of small investors jumping back into stocks, some trading options and futures. I’m old enough now, combined with twin quirks of being interested in finance at such a young age and having my lifespan line up with some interesting times in the capital markets, that I’ve watched this play out three times. At this point, you’d think it would lose its novelty but I still find my mouth dropping open and my head shaking in disbelief, mixed in with a bit of sadness. Reading what people are doing with their hard earned money – money that they exchanged for part of their life by selling time that could have been used traveling, reading, painting, or hanging out on the beach – doesn’t compute. If you took $5 out of their wallet, they’d throw a fit, but they’ll gamble $5,000 on something they barely understand.
Take this guy. He’s my age.
Brandon Garretson started dabbling in stocks a few years ago as the market began to rally. He got more serious last year after joining an online-trading forum. Now, the 31-year-old salesman of equipment to chemical plants makes about two trades an hour via his TD Ameritrade account.
“I love it,” said the Baton Rouge, La., resident. “You look over charts and come up with ideas for the next day. There’s really not a better feeling,” he said. He says he is considering quitting his job to trade full time.
He’s placing 2 trades an hour. For my personal household accounts, I placed less than 60 trades last year. He’s looking for something more from his portfolio than making money; there’s a sense of adventure, speculation, excitement. My adrenaline rush comes from the decades of money that gets added to the streams and gushers flooding in from sources that I’ve spent my career carefully putting together. I use the capital market as nothing more than a tool – a mechanism – to get my hands on more ownership. These people have no interest in owning businesses. They treat the stock as if it is something entirely unique from the operating enterprise itself.
Their Optimism on Stock Prices Is Misguided
Why are people more optimistic now? The market isn’t terribly overvalued, but we were doing cartwheels in 2009. We were jumping up and down in 2010. We were still smiling deliriously in 2011, when bargains could be found en masse by buying almost anything that had a good history of solid earnings and rising dividends. In 2012, we largely sat on our hands, collecting dividends. Last year, we had to look a lot closer to find opportunities because most excellent firms had risen to right around intrinsic value.
It’s started. Margin debt levels at brokerage firms have also begun to spike, indicating that now that stocks are more expensive, people are borrowing against their holdings. And when some event happens, be it a sudden crash like 1987 or a prolonged history-defining collapse like 1929-1933, they’ll blame someone else when it’s entirely self-inflicted pain. If someone were young enough, all it would take is following Ben Graham’s suggestion of holdings a mix of stocks and bonds, never less than 25% of either, for a long period of time in a low-cost, tax-efficient way. Even if the results were mediocre, a person in his or her 20′s has enough time that mediocre can still lead to shoot-the-lights-out wealth. Time makes up for a lot when compounding.
What is that saying? Something like, “Discipline is choosing what you want most over what you want right now.” It’s so very true. If you asked these small investors what they want, they’d say, “To make more money” or “To be financially independent”. Yet, their actions, based on probability alone, will almost assure a majority of them end up poorer than they’d otherwise be. They’re letting their impatience rob them of a rich future.