Day Trading debate - the cons
- Thursday, May 20, 1999
Recent technological developments have made possible a new trend in stock market activity: day trading. As implied by the name, day trading entails short term purchases and sales of market securities for the purposes of making quick incremental gains.
In the day trading world, long term consists of 30 minutes and stocks are purchased not for their fundamentals but for their momentum. A good trading day is determined by the level of market volatility. The idea is that the trading opportunities of market upswings are just as valuable as those created by market downturns, which are excellent conditions for shorting (a method used when you expect a stocks price to drop and you sell shares you dont own but buy them later at a lower price, thereby applying the traditional buy low, sell high strategy in reverse.)
Through the growing access to and convenience of online trading, thousands of former investors (who purchase stocks as investments based upon the companys fundamentals) are giving up their day jobs to become traders. Day traders have the capability of making or losing hundreds of thousands of dollars each day. This unprecedented access to the markets and the opportunity it represents has contributed to the increase in the number of people buying into the stock market.
So the question remains: Is day trading a good thing? With the impact that day trading has across the country, the pros and cons of the practice are definitely open to question. Crosswalk.coms own Mary Naber and Scott Fehrenbacher will give their views of the debate and you are encouraged to come to your own opinion. Click here to read Scott Fehrenbacher's The PROS of Day Trading.
The CONS of Day Trading
by Mary Naber
"The plans of the diligent lead to profit as surely as haste leads to poverty." Proverbs 21:5
The ringing shrill of machines, pulsating lights and numbers, and tapestry carpets are no longer confined to the casinos in Las Vegascompanies that you diligently screen out of your portfolio. Thanks to the advent of online trading, this gripping envelope of greed and desperation now meets you in your own home.
Online investing might be considered a positive technological advance, if it encourages you to learn more about the moral and financial direction of a solid company for long-term investment. But with all good things, perversion can follow. With access to your stocks and updated prices at your fingertips, be mindful of the temptation of day trading -- the exchange of stocks over the short-term, with the hope of a quick financial gain.
In my opinion, this depleting addiction is a waste of time, energy, and money.
Lost Cause in Theory
Most day traders (online or through a broker) think they can make accurate predictions on the future direction of a stock price, based on a chart of past performance, and updated company information on CNBC presuming that company news is not already reflected in the price.
All academic papers devoted to this subject have unequivocally shown that there is no correlation (or connection) of immediate future price movements to past price movements. The market has no memory, and is on a random walk according to the Efficient Markets Theory (EMH) discussed in earlier columns (click here to read Mary's article on the role of the EMH in Values Based Investing). There's no way to predict the short-term future, and therefore no way to profit from short-term predictions outside of luck!
As traders make bets on stock prices that will go up or down only by chance, they pillage themselves of money through extensive brokerage charges and taxes.
Lost Cause in Practice
According to a feature in the LA Times, "The Day-Trading Craze: Whose 'Crisis' Is This?" (2/21/99), "by some estimates no more than one or two of every 10 professional day traders make money. And only a fraction of those reel in enormous profits."
Day-trading firms concede that individuals should expect to lose in the tens of thousands of their own dollars before making a net profit, though this is questionable since most drop out of the game with great debt and depression beforehand. One woman took out a second mortgage on her home and lost all $50,000. "You could see how badly it affected her emotionally," a friend said. The few traders who do manage to make a living are consumed in the computer from 4 am to 12 midnight every day out of a need to get ahead.
Destruction to the Spirit
"(Man) boasts of the cravings of his heart; ... In all his thoughts there is no room for God." Psalm 10:3-4
Day trading cannot be justified because you found someone who made money from it. The greed and debasement of this game robs from the priceless and eternal spirit of both winners and losers.
You may become a slave to money. This is not honest investment in the long-term prospects of a solid, ethical company. In day trading, your mind can become obsessed with the short-term movements in a stock. Your spirit may become consumed with anxiety and you will slowly push God out.
Consequently, you may be more vulnerable to other sins, such as pride (when you boast of winnings to friends), and envy (when someone appears more successful). By investing your time in this game, you become calloused to God's true peace and purpose for your life.
The love for money is the only motivating force behind trading. Do not call it an education, for chart-studying and short-term stock movements will teach you NOTHING about measuring long-term prospects. Do not call it a game, unless you mean "white collar gambling." Gambling, as described on the most recent Christianity Today cover (5/24/99), is "known to be addictive and may cause bankruptcy, depression, chemical dependency, or suicide."
Destructive to God's World
I appealed to Christian friends and finance mentors to give me one quality of day trading that God might find redeeming, righteous, or holy. Everyone was stumped, with one exception: "Well, if someone is making money and supporting his family with it, what's the problem?"
Which invites the question, what is this person really producing for the good of humankind? Who can be satisfied in an occupation that brings no added value to the world? This is quite selfish, and a denial of the true gifts of unique talent that the Lord has given us.
Trading fails to add richness to the world -- it also robs from it. Engagement in this activity:
- Crowds up the online trading systems
- Creates unnecessary volatility in stock prices
- Encourages speculation with borrowed money that could be employed elsewhere
The addictive cycle is predictable. First, you become so excited about investing online that you will want to check on the condition of your stocks daily. Within a week or so, while some prices have dropped, you will find that one of your stocks has jumped 20% and you will decide to sell out to lock in the appreciation or profit, making you think, "This is easy!"
But most day traders won't go into financial ruin overnight. As Barry Minkow attests, you will first make small compromises of greed while the enemy works in subtle ways. (click here to read the Interview with Barry Minkow).
If your intent is to truly invest online, beware of the day trading temptation, "Do not wear yourself out to get rich. Have the wisdom to show restraint." Proverbs 23:4
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