Investor Psychology

Gambling in Stocks Is Risky Business

Part of the fun of investing is betting on the “next big thing.” Who doesn't want to discover the next Amazon, Netflix or Tesla?

I’m not surprised at the stock market’s recent rockiness. After a straight-up ascent that took market benchmarks to all-time highs—following the shortest bear market on record—the market has again logged some harrowing down days. Among the surest signs that stocks might be due for a reckoning is a surge in speculation that has mirrored the market’s spectacular rise since late March.

Speculative fever among small investors spiked when the pandemic took root in the U.S. Folks were stuck at home, flush with stimulus checks, with casinos closed and sports on hiatus. The stock market was open, however, and over the summer, even as some casinos started to reopen and something resembling our national pastimes resumed, the rumors (and some evidence) continued to point to a new generation of adventurers in the financial markets.

Individual investors’ interest in day trading has surged. “There is no doubt that day trading is a piece of the rally,” says Nicholas Colas, cofounder of investment research firm DataTrek Research. “The dollar amounts are small, but interest is high.”  

Place your bets. There is no better standard bearer for the trend than Dave Portnoy, celebrity founder of the irreverent sports, betting and pop culture blog Barstool Sports. Casino operator Penn National Gaming bought a 36% interest in Barstool in January for $163 million in cash and stock, prompting Portnoy to muse on CNBC about someday buying a sports team.

Instead, in March, Portnoy announced he was becoming a full-time day trader: “Once March Madness and life in general was canceled, I needed something to pass my time. I was already down about 50% of my net worth since the stock market crashed, and my plan was to day trade my way back to the top. TO BE VERY CLEAR [emphasis his], I have zero clue what I’m doing, I have no inside information, I wouldn’t recommend doing what I’m doing to anybody else, I’m not a financial expert. I’m just doing this to get my fix.”

Portnoy started with $3 million in an online brokerage account and has made and lost hundreds of thousands of dollars several times over—practically in the same day. He livestreams and tweets about his trades under the hashtag #DDTG, for Davey Day Trader Global.

Clearly, this style of investing is not the Kiplinger way. But it illustrates a conundrum: Part of the fun of investing is betting on the “next big thing.” Who doesn’t want to discover the next Amazon, Netflix or Tesla and ride those shares into the stratosphere?

How can you scratch that speculative itch without sacrificing your financial security? I asked Burton Malkiel, Princeton professor emeritus and author of A Random Walk Down Wall Street. His view of the market is that you’re unlikely to beat it, but you can join in its long-term uptrend by investing in market-tracking index funds.

And yet, Malkiel enjoys the intellectual exercise of picking individual stocks and even owns shares in volatile tech darling Salesforce.com. “How do I square that with sensible investing? You take your serious retirement money and invest it in index funds. Then, if you’ve got a little extra money, go ahead, have fun. I do this myself.”

Even then, resist the urge to trade in and out, he says. “Do some homework, do your stock picking and then hold on.” For those who succumb to the siren call, at least acknowledge what you’re doing, says Malkiel. “It’s like the horse races. From time to time, someone will get the daily double. But over the long haul, you’ll lose. Gambling may be fun—I enjoy the horse races—but I do it for entertainment, not because I think it’s investing.”

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