Day Trading: How To Lose Your Money

A website banner advertisement on the front page of a major online news site read: ‘Free Day Trading eBook – The Complete Guide to Day Trading’. I clicked on the ad, curious as to how exactly ‘Day Trading’ was being peddled this time, and was greeted by the following screaming headline: ‘THERE’S NEVER BEEN A BETTER TIME TO TAKE CONTROL OF YOUR FINANCIAL FREEDOM’.

Manure For Sale

Talk about selling a big ole’ stinky pile of manure! Let’s get this straight right off: if it smells like manure, it is manure. Day Trading will NOT lead you anywhere close to financial freedom. In fact, the gigantic, overwhelming, stupendous odds are that you will lose money, time and again, if you try your hand at Day Trading.

Why? Because Day Trading is gambling, buying and selling securities on the same day, placing bets as to which securities will go up, which fall down, during a time period lasting anywhere from milliseconds to seconds to minutes to several hours. And just like casino gambling, the odds are hugely stacked against you. Oh, sure, you might garner a win here and there, enough to keep your hopes up, convince your self that you should stay in the game. But eventually, losses will far outstrip gains.

And despite what Manure Salesmen tell you, a Process, a Strategic Game Plan, will not help. ‘Naturally’, these folks say, ‘you’d be a fool not to have a Process before you start trading, you know, because a Process allows you to succeed no matter what the market conditions. A Process moves the odds in your favor so it’s not about dumb luck, it’s not gambling. Rather, it’s a proven method that leads to your success!

A Process? Strategic Game Plan? More and more and more Manure! 99% of those who stay at day trading long enough will lose all of their money. Ah, but what if I’m in the 1%, you ask? Well, if you want to take on those odds, go for it, roll the dice, knowing that you will most likely, almost definitely, probably certainly, lose.

Sure, there exist a tiny percentage of people who consistently make money at Day Trading. But let me tell you something about these folks: typically, they work for large financial institutions; trained in the field of finance and have years of work experience; use other people’s money; have access to company specific and market moving news before the public; and benefit from computers programmed with the most current analytical software designed to make trading decisions every millisecond based on a thorough review of fluctuating prices, incoming orders, and financial news.

As for go-it-alone individuals, they have limited technological resources, bet with their own money, are less skilled, and are prone to let negative biases and emotions interfere with rational decision-making. The result? Risk of loss is much, much higher.

Who Makes Money

Manure Men, predators, scam artists, who pitch ‘Read my book! Attend my seminar! Sign up for my online course guaranteed to make you rich!’ – these are the ones who make money. And they do so off the backs of vulnerable people who fall for the pitch delivered by people lacking a conscience, blind to ideas of ethical right and wrong, all too willing to sell a Brooklyn Bridge or two to anyone who comes calling.

But hey, we live in a world of buyer beware, right? Besides, as Manure Men will tell you, ‘I did so incredibly well at Day Trading that I felt compelled to share my secret because I want everyone to be rich like me.’

When I hear baloney like this, I laugh and cry at the same time. I laugh because the claim is so absolutely false and ludicrous. And I cry because vulnerable people believe it, then end up losing money, maybe even their life savings.

Why People Willingly Step in Piles of Manure

What’s the hook, the angle, the catch that keeps drawing in more customers? It’s a multi-layered lure.

Part 1

Independence. Ditch your 9 to 5 job and work at home on your own schedule but within market hours.

Part 2

Easy Money. On the surface, this is how Day Trading is sold. ‘I became rich day trading – you can too!’ Driven by greed, seduced by the fantasy of fast, easy money, time and again new victims buy into the program only to lose their shirt.

Part 3

Thrill Seeking. The forces that light up the human mind when playing a slot machine, buying a lottery ticket, or sitting down at a Las Vegas table to play Texas Hold’em, are the same forces operating for Day Traders.

There’s an adrenaline rush, an instant feedback from trading (whether win or lose) that satisfies the appetite for instant gratification. Buy and hold a stock for a few months or years? How boring is that!


unknownEnter Buddha

The goal is not to achieve wealth as soon as possible because to arrive all at once would be self-defeating. The goal is to grow – be it material, spiritual, psychological and emotional growth – and in the process experience all that life has to offer.

Be An Investor NOT a Day Trader

Day Trading is not Investing. Do your self a favor: don’t even consider Day Trading. Ever.

Unlike Day Trading, investing is not about entertainment. Investing is boring. It should be boring. Because investing is about:

  • Diligently and wisely putting money to work for you.
  • Accepting a level of risk that allows you to sleep well.
  • Understanding your investments. And if you don’t understand the investment, then don’t invest.
  • Knowing the associated costs, whether these are transaction fees, account fees, fund management fees, and tax treatment of income, dividends or capital gains.
  • Diversifying your holdings to minimize risk and reduce volatility.

Invest in YOU

If financial management is not your occupation, and you’re not really interested in managing your investments, then hire a Robo-Advisor or Financial Advisor. What’s most important is to invest in YOU!

Whatever your strengths, your passions, invest time and effort in developing your self further, going deeper, because bringing value to your self, your family, your community, is a worthwhile endeavour.

 

 

Fight Fear, Get Rich

Shortly after the end of the 2007-2009 recession, a relative (between you and me, we’ll call him ScaredyPants) asked me to manage his money. He was seventy, widowed for many years, generally a happy-go-lucky sort of guy, and his portfolio was worth about a million bucks.

Eighty per cent of the portfolio was cash, the other twenty per cent was invested in one-year term deposits with the total portfolio earning less than 1.0%.

In 2010, inflation ran at 1.5%; in 2011, 3.0%. Meaning, as long as the rate of inflation exceeded investment return, ScaredyPants was losing money. But he was fine with the slight hit to his portfolio. Because after the Great Recession, ScaredyPants was terrified of losing money.

Today, more than eight years later, ScaredyPants asset allocation has not changed. Drawing seventy-five thousand a year for living expenses and to pay income taxes, having no revenue sources other than his portfolio and a small government pension worth about sixteen thousand annually, his liquid assets have dropped from a cool million to less than $500,000. At this rate, ScaredyPants will be broke if and when he reaches the age of eighty-five. Yet, he refuses to change his portfolio – such is the debilitating grip of fear.


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Enter Buddha

It is perfectly natural to be fearful. When fear comes upon you, embrace it, watch what is happening to your physical body, how it tightens. Watch what is happening to your thoughts, how they turn cloudy and negative. And wait for the feeling of fear to pass, because it always passes. And once fear passes, only then may you make wise decisions.


Sidestepping the Groove

Here’s the thing about fear: it stops us from getting to that really groovy place where we want to dance and sing and shake it all out because we feel financially independent and free!

As investors, as managers of our own money, we don’t have a whole lot of constructive use for fear. Rather, fear is a destructive emotional anchor, driving us to stuff money under the proverbial mattress, miss out on investment opportunities, let cash sit in a bank savings account earning next to nothing, or invest in ultra-safe-barely-pays-any-interest federal government bonds. All of which are surefire ways to NOT walk the path toward financial freedom.

Nervous Nellies

No one enjoys lingering in a state of fear or high anxiety. Still, it happens to all of us because we’re biologically wired this way: fear being an evolutionary mechanism designed to (1) signal danger, threat or conflict, and then (2) activate an adaptive response.

Okay, so we’re locked into human biology. But for the purpose of retiring early AND not running out of money before reaching our final resting place, isn’t it possible for savers and investors to flip the fear off switch?

Hey, smart guy, look around. The world is crazier than ever; the reasons for being fearful are endless!

I know, I get it, you don’t have to look too hard to find one geopolitical crisis or another that makes you want to stockpile supplies and hide out in a desert bunker. On top of this, there are your personal financial circumstances, be it shaky job security, unexpected expenses, or any other uncertainty that holds you back from contributing more to investments.

But the thing is, running away from financial markets is not the solution to being the CEO of your own show one day. In fact, it’s the exact opposite. If you let fear stop you from investing, then financial independence will remain a pipe dream.

Shift Your Perspective

To manage fear, to build wealth, shift your take on events. For example, when ScaredyPants thought of investing in the stock market, all he could see was the risk of loss. Well, there’s also the other side of the coin, the risk of gain, especially for long-term investors.

Granted, ScaredyPants represents an extreme example. For many others, risk is acceptable when it seems there is little chance of loss. So … when does the stock market offer such conditions? Well, when stock prices are going up, positive vibes fill the media, and fear has been relegated to the backseat. But, but, but … this is the exact wrong time to invest!

You want to invest when fear is in the air, when stock values are depressed and ON SALE.

But this is not what happens for most investors. Instead, time and time and time again, people do the exact opposite of what should be done; they buy high (when fear has receded) and sell low (when fear is ascending).

Your path to financial freedom would be that much shorter if you could shift perspective, and see depressed prices as actually presenting less risk, and potentially greater reward.

Easier Said, But Definitely Do-Able

Here’s BuddhaMoney’s guide to what needs to be done to address your fears, and maximize portfolio performance:

  1. Diversify. You’ve heard it so often that maybe you tune it out: don’t put all your eggs in one basket. Because a diverse pool of assets goes a long way to reducing fears, minimizing risk, and lessening major moves in portfolio value.

What kind of risk gives rise to fear? Market performance, economy performance, interest rates, inflation, and longevity (the possibility that you will outlive your money). To alleviate fear (and ulcers) caused by stock market value gyrations, hold some bonds. If you think the domestic economy is about to tank, buy foreign securities. If the bull market is slowing and you’re fearful of an impending crash, increase your cash position.

  1. Balance and ReBalance. Naturally, given that you’re a BuddhaMoney devotee, you have an investment plan setting out how much money is allocated to certain assets. For example, 60% stocks, 30% bonds and 10% cash, invested in domestic and foreign securities, exchange traded funds (ETF) and/or individual securities.

Well, if your stocks have increased in value and now make up 70% of your portfolio, then its time to rebalance, to sell 10% of the stock holdings (sell the winners; and when you sell at the ‘high’ price, it sure feels good) and allocate the proceeds to bonds and/or cash. Why do this? Because rebalancing reduces risk, reduces those situations where you feel fearful, and when you have a thoughtful investment plan in place its best to stick to that plan to achieve future goals.

  1. Pay Less Attention

The stock market is a roller coaster. And the ride makes a whole lot of folks queasy. But by no means does that mean you should jump off. Instead, tweak your behavior: stop checking prices every day or even every week. Because it’s dangerous for your health. When your hyper-focused on daily stock prices, you become more and more emotionally invested in both small and large movements. In turn, this may cause you to forget your long term goals and make poor decisions based on short term price swings.

  1. Keep Costs Down

Managing costs contributes to minimizing financial risk, i.e., the lower your investment costs, the more money in your pocket.

This may mean choosing low cost Index Funds; using the services of a Robo-Advisor; managing your own investments with a discount broker; or negotiating lower fees with a financial adviser.

  1. Recognize Noise For What It Is

Media knows that we read what we connect with, and most often that connection is on an emotional level. When the stories lean negative, this may affect our decision-making, and not necessarily for the better. So don’t let the stories suck you in and throw your well thought out plan off course. Because your financial plans, your financial future, should not be adjusted based on media stories or even what you discuss with friends. Instead, your plans should be based exclusively on your current needs, short, medium and long-term goals, and tolerance for risk.

Sure, we’re all susceptible to fear. But when you’re able to harness that fear, you sure do stack the odds in your favor that financial independence will be reached according to your plan.

Pot Investors Go Up in Smoke

Marijuana investors are stampeding for the exit these past few days. Why? Well, in keeping with herd-like behavior, there isn’t a rational explanation. Rather, this is a classic example of investor anxiety running rampant.

Here’s what stoked a fearful run for the exit: Bill Blair, leading the Canadian Federal government’s legalization effort, commenting in the Globe and Mail on the timeline for recreational legalization stated, “We will take as much time as it takes to do it right. I’m pretty reluctant to suggest a specific time frame, frankly, because I don’t know how long this will take in each of our 10 provinces and three territories.”

http://www.theglobeandmail.com/globe-investor/investment-ideas/marijuana-stocks-drop-as-trudeaus-pot-czar-says-canada-wont-rush-into-legalization/article34230589/

It’s All Been Said

So, this comment alone is reason enough to bolt from pot stocks en masse? The thing is, Blair is not saying anything that hasn’t already been said. Consider the following:

  • November 27, 2016. The Globe and Mail quotes Anne McLellan, marijuana legalization task force chair, who says that marijuana will be moved “… from a criminal regime, where this was an illegal substance with criminal sanctions – some of them very serious – to a legalized product in a regulated marketplace. It’s important to move slowly, and deliberately, in implementation. [emphasis added]

http://www.theglobeandmail.com/news/politics/report-on-marijuana-legalization-in-canada-due-this-week/article33065608/

  • November 30, 2016. The Financial Post (FP) quotes Brendan Kennedy, CEO of private equity firm Privateer Holdings, “It’s a long path to legalization. Investors sort of have these expectations baked in that are unrealistic. I think January 1, 2019 would be optimistic … even 2020, when all said and done.” FP goes on to repeat Anne McLellan’s statement that ‘it is critical the government goes slow on reforming the laws. [emphasis added]

http://business.financialpost.com/news/agriculture/long-path-to-legalization-marijuana-companies-not-convinced-of-legal-recreational-market-by-2018

  • January 2, 2017, Canadian Broadcasting Corporation (CBC) reports “While the federal government plans to table its new marijuana legislation in the spring of 2017, it will take much longer to study the bill and eventually pass it into law. It will likely be at least 2018 by the time the legalization process is complete.”

http://www.cbc.ca/news/canada/toronto/marijuana-toronto-2017-1.3896575

  • March 2, 2017, the Canadian Department of Justice website states, “In the spring of 2017, the Government of Canada will propose to Parliament and Canadians a new legislative framework for the legalization of cannabis.”

Addressing the issue of when legalization will happen, the website states, “It’s a serious, complex matter that will take time.” [emphasis added]

http://www.justice.gc.ca/eng/cj-jp/marijuana/info.html

The Facts Please

There you have it. No new information was announced. Neither Bill Blair nor the Canadian government changed the game.

Any informed investor knows that, owing to the nature of the legal and consultative process, it is not possible to give an exact date on which marijuana will be legalized for recreational use. And any of the listed marijuana companies worth their buds know full well that the magic date may not happen until 2018, 2019 or 2020. And these companies have organized their business model accordingly.

On the face of it, the fundamental nature of the business of producing, distributing and selling marijuana remains the same; and the prospects for a massive market remain the same (report from Deloitte estimates a +$22 Billion industry in Canada – http://www.businessinsider.com/deloitte-weed-could-be-226-billion-canada-2016-10). Then why are investors panicking?

Chalk it up to blind fear and a crowd mentality where one lemming follows another off a cliff simply because that’s what the other guy is doing.

Unfortunately, too many investors are short-term players who pay too little attention to available information. These are the investors who foolishly sell at a loss, because they’re consumed with fear, then kick themselves when the stock bottoms and resumes its upward climb. The winners are those who sit tight or, better yet, realize the opportunity and buy stock at depressed levels.


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Enter Buddha

When fear and panic arise, accept these feelings. Recognize and make friends with them. But do not take action while in their grip. These feelings will pass. And once they pass, and your mind is clear, only then may you make wise decisions.


And Then There’s Organigram

A few days before the general downturn among pot stocks, Organigram Holdings Inc. (CVE:OGI) was hammered owing to filing of a class action lawsuit. The basis of the lawsuit is a claim that the company sold pot containing unapproved pesticides.

Now, if OGI had intentionally or grossly negligently spiked the weed to juice harvests, then it may well be on the financial hook for some serious dough beyond the retail cost of product. As importantly, if not moreso, the OGI brand would take a big hit, with the possibility that it would not recover. And a serious haircut to OGI’s stock value would be warranted, at least in the short term.

But none of the facts point to OGI being guilty of corporate shenanigans. Which brings up the question: what’s the deal with the extreme reaction by investors? Did investors inform themselves of all details concerning this issue or did they simply scramble to sell as soon as the plaintiff’s law firm informed the media of its filing? My guess is the latter.

The Facts Please

An exhaustive internal corporate investigation was unable to determine the source of pesticide traces. And Health Canada responded to the issue by:

  • Stating that it had not received any patient complaints about adverse reactions from product recalls;
  • Confirming its own test results determined that the affected products represent a low health risk; and
  • Declining to take any enforcement action against OGI.

That’s all fine and good but couldn’t OGI still be held liable for damages, or agree to a settlement payment just to make the lawsuit go away? Yes, to both of these questions.

Fortunately, the company employs a skilled management team that has taken the following actions to diminish any financial fallout from the lawsuit and, in the process, bolster its performance and its brand:

  • All potentially affected product were voluntarily recalled and destroyed;
  • Enhanced testing protocols, exceeding Health Canada’s regulatory requirements, have been implemented;
  • For the purpose of transparency, as of mid-March, 2017, future test results will be posted on the company’s website;
  • All customers who purchased affected product have been issued a credit equivalent to their cost;
  • According to OGI, the majority of its customers have accepted, and are using, the credit; and
  • Financial exposure has been minimized by allocating sufficient funds to cover losses related to the recall.

In addition, OGI’s currently suspended organic certification, which sets it apart from its pot growing peers, will likely be reinstated by Ecocert in March or April, 2017. Ecocert validates organic standards (http://www.ecocert.com/en).

Crystal Ball

Where will OGI go tomorrow and beyond? As you know, stock market investing does not offer guarantees. But if we keep our eyes open, if we take the time and exert energy necessary to fully inform ourselves about a particular investment, and not let emotions carry us away, then we stack the odds in our favor as far as good, and profitable, decision-making is concerned.

Full Disclosure: As of the date of this article, I’m a chilled shareholder of OGI.