These are nerve-racking times for investors, with stock markets bouncing all over the place. We were euphoric when the ASX hit 7,162 on 20 February 2020, but that emotion was short lived as it plunged to 4,546 just four weeks later.
Of course, there were headlines galore proclaiming how many billions had been wiped off our wealth, and many retirees went into panic mode. My inbox was flooded with emails asking whether to sell now and then come back in when the market had turned. Or in more extreme cases, put all superannuation into cash and then “enjoy a risk-free retirement” for the rest of their lives.
I reiterated what I have been saying for years: picking the top and bottom of markets is impossible, and the only sensible way to handle the current volatility is to take a long-term view and hang in there.
From the low day, the ASX went steadily upwards till it hit 6,148 on 10 June - that was a rise of 36% in just 10 weeks. Since then it’s been moving more down than up, and now we are seeing a flood of headlines indicating a second crash may be upon us. Who knows? As far as I’m concerned, it’s all too difficult, and I continue to look at my portfolio on a long-term basis.
Rise of gambling-trading is a big worry
But what concerns me enormously is the rise of gambling in our community. We are bombarded with gambling advertisements, even in prime time when young people are watching, and statistics show that stock market trading has exploded during the COVID-19 lockdowns. Graham Hand has written about this in detail. One newspaper carried a two-page feature on the new breed of share traders, quoting one exclaiming, “This is not right – it should not be this easy.” In the US, the number of active trading accounts has increased by 70%, helped by the popular trading app, Robinhood, which is offering zero commission on trades.
And that’s the problem: it is all too easy. You just pick a stock, noticing it’s up $0.30 today then down $0.30 tomorrow and that pattern keeps repeating. You tell yourself that there’s nothing to it. Sell high, buy low and make a fortune.
Well, there is no such thing as a free lunch. The problem with trading like this is that it is essentially gambling, and it’s highly addictive. Psychologists claim the hit the person gets from a successful share trade, or even a great golf shot, is remarkably similar to the hit from injecting drugs.
Let me share a first-hand experience
It’s been a volatile year, and early in May when I was talking to my stockbroker, I told him I was intrigued by the ups and downs happening with such boring regularity, and thought maybe I should have a part of the action. Having watched the NAB share price rise for weeks, I sold 5,525 shares at $16.38. I figured I had a good hedge as a large part of my super fund is invested in the index.
Jackpot. Eight days later, NAB had fallen to $15.50 and I bought 5,775 back and I was ahead. Then 14 days later, I sold that holding for $16.42 and was congratulating myself for making some easy money. But you guessed it, the next movement was up ever upwards and at date of writing, NAB is sitting at $18.67. Yes, my index funds rose, but they would have done that anyway. My first venture and last venture at trading cost me over $10,000.
(It’s true - it was my first go at trading at the tender age of 80. I thought that up-and-down would keep on going. It’s like the racehorse system I invented about 40 years ago which is almost foolproof. I found that horse number two wins one in six races but there would be win, loss, loss, win, win, loss, loss, win and usually a win followed one or two losses and then there was a gap. So the trick was to look for a win and then start to bet. The trouble was you had to use a staking system to recover previous losses. Which meant you are betting increasing amounts of money, and about once every three years, a win was followed by another long run of losses which took all your money.
That was a long time ago. A professor of mathematics told me my system was nonsense because each race is a separate event).
Charlie Munger, Warren Buffett’s business partner, summed it up perfectly when he said:
“In the modern world people are trying to teach you to come in and trade actively in stocks. Well I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin.”
He is spot on. A major benefit of shares is their unique ability to be bought and sold quickly in small parcels. But this benefit is also their biggest drawback. It encourages people who should never get near the share market to start to use it as a casino. Just last week, Forbes reported that a 20-year-old from Illinois had committed suicide when his account went US$750,000 into the red.
And to make matters worse, all this gambling is contributing to the volatility.
Trading is not investing
I understand we are living in uncertain times. But anybody serious about keeping their finances in good shape needs to understand the difference between investing and trading. Investors take a long-term view and do not try to catch a rising or falling market. Traders are like people who hunt day-to-day and many finish up dying of starvation.
American economist Paul Samuelson put it simply:
"Investing should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas."
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. See noelwhittaker.com.au. This article is general information and does not consider the circmstances of any investor.