Posts tagged ‘Steven Cohen’
Day Trading Your House
By several measures, this economic recovery has been the slowest, most-challenging expansion since World War II. Offsetting the painfully slow recovery has been a massive bull market in stocks, now hovering near all-time record highs, after about tripling in value since early 2009. Unfortunately, many investors have missed the boat (see Markets Soar – Investors Snore and Gallup Survey) with stock ownership near a 15-year low.
But it’s not too late for the “sideliners” to get in…is it? (see Get out of Stocks!*). Milfred and Buford are asking themselves that same question (see Investor Wake-Up Call). Milfred and Buford are like many other individuals searching for the American Dream and are looking for ways to pad their retirement nest egg. The seasoned couple has been around the block a few times and are somewhat familiar with one get-rich-quick strategy…day trading stocks. Thankfully, they learned that day trading stocks didn’t work out too well once the technology boom music ended in the late 1990s. Here’s what the SEC has to say about day trading on their government site:
Be prepared to suffer severe financial losses. Day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status. Given these outcomes, it’s clear: day traders should only risk money they can afford to lose. They should never use money they will need for daily living expenses, retirement, take out a second mortgage, or use their student loan money for day trading.
Milfred & Buford Day Trade House
Milfred: “Now, Buford, I know we lost of our IRA retirement money day trading tech stocks, but if technical analysis works and all the financial news shows and talking babies on TV say it will make us a lot of cabbage, maybe we should try day trading our house?”
Buford: “Now I know why I married you 60 years ago – it’s that brilliant mind of yours that complements that sexy figure!”
Veteran readers of Investing Caffeine know I’ve been a skeptic of technical analysis (see Technical Analysis: Astrology or Lob Wedge), but a successful investor has to be open to new ideas, correct? So, if technical analysis works for stocks, then why not for houses? The recovery in housing prices hasn’t been nearly as robust as we’ve seen in stocks, so perhaps there’s more upside in housing. If I can get free stock charting technicals from my brokerage firm or online, there’s no reason I couldn’t access free charting technicals from Zillow (or Trulia) to make my fortunes. Case in point, I think I see a double-bottom and reverse head-and-shoulders pattern on the home price chart of Kim Kardashian’s house:
Source: Zillow
Of course, day trading isn’t solely dependent on random chart part patterns. Pundits, bloggers, and brokerage firms would also have you believe instant profits are attainable by trading based on the flow of news headlines. This is how Milfred and Buford would make their millions:
Milfred: “Snookums, it’s time for you to pack up all our stuff.”
Buford: “Huh? What are you talking about honey buns?”
Milfred: “Didn’t you see?! The University of Michigan consumer confidence index fell to a level of 81.3 vs. Wall street estimates of 83.0, bringing this measure to a new 4-month low.”
Buford: “I can’t believe I missed that. Nice catch ‘hun’. I’ll start packing, but where will we stay after we sell the house?”
Milfred: “We can hang out at the Motel 6, but it shouldn’t be long. I’m expecting the Philly Fed Manufacturing index to come in above 23 and I also expect a cease fire in Ukraine and Gaza. We can buy a new house then.”
I obviously frame this example very tongue-in-cheek, but buying and selling a house based on squiggly lines and ever-changing news headlines is as ridiculous as it sounds for trading stocks. The basis for any asset purchase or sale should be primarily based on the cash flow dynamics (e.g., rent, dividends, interest, etc., if there are any) of the asset, coupled with the appreciation/depreciation expectations based on a rigorous long-term analysis.
When Day Trading Works
Obviously there are some differences between real estate and stocks (see Stocks & Real Estate), including the practical utility of real estate and other subjective factors (i.e., proximity to family, schools, restaurants, beach, crime rates, etc.). Real estate is also a relatively illiquid and expensive asset to buy or sell compared to stocks. – However, that dynamic is rapidly changing. Like we witness in stocks, technology and the internet is making real estate cheaper and easier to match buyers and sellers.
Does day trading a stock ever work? Sure, even after excluding the factor of luck, having a fundamental information advantage can lead to immediate profits, but one must be careful how they capture the information. Raj Rajaratnam used this strategy but suffered the consequences of his insider trading conviction. Furthermore, the information advantage game can be expensive, as proven by Steven Cohen’s agreement to pay $1.2 billion to settle criminal charges. While I remain a day trading and technical analysis skeptic, I have noted a few instances when I use it.
Whatever your views are on the topics of day trading and technical analysis, do Milfred and Buford a favor by leading by example…invest for the long-term.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds, but at the time of publishing SCM had no direct position in Z, TRLA, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Stock Market: Shrewd Bet or Stupid Gamble?
Trillions of dollars have been lost and gained over the last five years. The extreme volatility strangled investment portfolios, and as a result millions of investors capitulated by throwing in the towel and locking in losses. Melted 401ks, shrunken IRAs, and beat-up retirement accounts bruised the overarching psyche of Americans to the point they questioned whether the stock market is a shrewd bet or stupid gamble?
The warmth and safety of bonds provided some temporary relief in subsequent years, but the explosive rebound in stock prices to new record highs in 2013 coupled with the worst year in a decade for bonds still have many on the sidelines asking whether they should get back in?
As I’ve written many times in the past (see Timing Treadmill), timing the market is a fruitless effort. Elementary statistics, including the “Law of Large Numbers” will demonstrate that blind squirrels can and will beat the market on occasion, but very few can consistently beat the stock market indices for sustained periods (see Dart-Throwing Chimps).
However, there have been some gun-slinging hedge fund managers who have accumulated some impressive track records. Because of insanely high management fees, many overpaid hedge fund managers will swing for the fences by using a combination of excessive leverage and/or concentration. If the hedge funds connect with lucky returns, the managers can take the money and run. If they swing and miss…no problem. Close shop, hang out a shingle across the street, change the hedge fund’s name, and try again. Of course there are those successful hedge fund managers who have learned how to manipulate the system and exploit information to their advantage, but many of those managers like Raj Rajaratnam and Steven Cohen are either behind bars or dealing with the Feds (see fantastic Frontline piece on Cohen).
But not everyone cheats. There actually are a minority of managers who consistently beat the market by taking a long-term approach like Warren Buffett. Long-term outperforming managers are like lifetime .300 hitters in Major League Baseball – the outperformers exist, but they are rare. In 2007, AssociatedContent.com did a study that showed there were only 12 active career .300 hitters in Major League Baseball.
Another legend in the investment industry is John Bogle, the founder of the Vanguard Group, a firm primarily focused on passive, index-based investment strategies. Although it is counter-intuitive to most, just matching the market (or index) will put you in the top-quartile over the long-run (see Darts, Monkeys & Pros). There’s a reason Vanguard manages more than $2,000,000,000,000+ (yes…trillion) of investors’ money. Even at this gargantuan size, Vanguard remains a fraction of the overall industry. Regardless, the gospel of low-cost, tax-efficient, long-term horizons is slowly leaking out to the masses (Disclosure: Sidoxia is a devoted user of Vanguard and other providers’ low-cost Exchange Traded Funds [ETFs]).
Rolling the Dice?
Unlike Las Vegas, where the odds are stacked against you, in the stock market the odds are stacked in your favor if you stay in the game long enough and don’t chase performance. Dr. Ed Yardeni has a great chart (below) summarizing stock market returns over the last 85 years, and what the data highlights is that the market is up (or flat) 69% of the time (59/86 years). The probabilities are so favorable that if I got comparable odds in Vegas, I’d probably live there!
Source: Dr. Ed’s Blog
Unfortunately, rather than using this time arbitrage in conjunction with the incredible power of compounding (see A Penny Saved is Billions Earned), many individuals look at the stock market like a casino – similarly to betting on black or red at a roulette wheel. Speculating about the direction of the market can be fun, and I’ve been known to guess on occasion, but it’s a complete waste of time. Creating a long-term plan of reaching or maintaining your retirement goals through a diversified portfolio is the way to go – not bobbing in out of the market with cash and bonds.
At Sidoxia, we don’t actively trade and time individual stocks either. For the majority of our client portfolios, we follow a growth philosophy similar to the late T. Rowe Price:
“The growth stock theory of investing requires patience, but is less stressful than trading, generally has less risk, and reduces brokerage commissions and income taxes.”
Nobody knows the direction of the stocks with certainty, and irrespective of whether the market goes down this year or not, history has proven the stock market has been a shrewd, long-term bet.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
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