Downfall of a Day Trader
By Matthew Goldstein
January 24, 2001
A YEAR AGO, Craig Mazeska, a teacher at a small school for developmentally disabled children near Baltimore, was living proof that anyone with enough nerve could get rich trading stocks online.
Like the truck driver in that early Discover brokerage advertisement, Mazeska had become an unlikely millionaire almost overnight. In just four years, Mazeska, now 30 years old, parlayed an initial $20,000 investment into a portfolio worth more than $2.2 million. His hot hand allowed him to buy a two-bedroom condominium in suburban Baltimore and a BMW sports car — with cash. Some acquaintances even suggested he consider quitting his teaching job and simply trade stocks.
It's a good thing he didn't follow their advice. Since last year's violent tech sell-off, Mazeska's portfolio has been sliced to $420,000. Hey, he's still well ahead of the game, right? In fact, the situation is far worse than it appears. Mazeska owes the Internal Revenue Service more than $350,000 in unpaid taxes stemming from his huge trading gains of 1999. His once-giddy dreams of an early retirement have given way to the bitter reality of staying one step ahead of bankruptcy. These days, he and his attorney spend a lot of time trying to keep the tax man at bay without having to liquidate his entire portfolio.
"I went from this state of euphoria where I could have easily retired, to a point back in December when I had to consider selling my home," says Mazeska, who discussed his situation in a series of interviews over the past few weeks. "I was greedy. I had become too confident and I let my ego get the better of me."
Mazeska's riches-to-almost-rags story is an extreme example of the kind of pain felt by millions of investors since last year's market downturn. In hindsight, his mistakes are painfully obvious — Mazeska bought too many stocks on margin, invested too heavily in technology stocks and waited too long to pay capital-gains taxes on his earlier profits. Maybe worst of all, he believed far too much in his stock-picking prowess.
But there's more to Mazeska's story than just a checklist of investor no-nos. It's a cautionary tale about how online trading can cause investors to lose sight of what buying stocks is all about — investing for the future.
Mazeska admits that stock trading became a "mild obsession." Unlike most online investors, who buy and sell stocks a few times a month at the most, Mazeska was like a day trader on speed, sometimes making 100 transactions a day, often between classes at work. Things got so out of hand that the school finally forbade all trading during school hours. That just meant that more needed to be done afterhours.
He also found himself taking more risks with his money by making an increasing number of his trades on margin (borrowing stock from a broker) in hopes of scoring double with the added leverage. At the height of his success, trying to outwit other investors and beat the Wall Street traders at their own game became the priority. "It wasn't always the money — [sometimes] it was the challenge," says Mazeska, who has an undergraduate degree in economics from Johns Hopkins University. "I loved the thought of trying to outthink the market. I was beginning to think I could do no wrong."
Mazeska's mild obsession began to take a heavy toll. He admits he spent too many hours researching stocks, thinking about stocks and posting notes on online stock message boards — all of which created tension with his then-girlfriend.
Unfortunately, Mazeska's story isn't uncommon. Counselors and psychologists who specialize in gambling addiction say they've seen an increase lately in the number of people suffering from another problem — addiction to online trading. For these people, a computer with an Internet connection is just as dangerous as a casino slot machine is to a compulsive gambler. (For more on online-trading addiction, see "Online-Trading Addiction: the Warning Signs.")
Looking back, however, it's also easy to see how online trading could be so seductive. In 1999 alone, Mazeska posted a $1.46 million portfolio gain. He also had great success managing an investment club — The Desert Storm Investment Club — for himself, his parents, brothers and a few others. (Before going to college, Mazeska enlisted in the U.S. Marine Corps and saw duty in the Gulf War. He spent most of his tour in a division that built prisoner-of-war camps and cleared land mines.) One of Mazeska's best moves came during the summer of 1999, when he loaded up on 40,000 shares of USWeb/CKS — an Internet consulting firm that's now part of MarchFirst (MRCH). At the time, USWeb's stock was selling around $20. Mazeska sold most of his shares when the stock sprinted to the $40 mark several weeks later — at a profit of $800,000.
But like many investors, Mazeska's golden touch began to disappear last April, when the Nasdaq Composite was hit by the first of several painful sell-offs in technology and Internet stocks. In Mazeska's case, his problem stemmed from a combination of bad timing and bad judgment. Just before the ground began to rumble beneath the Nasdaq, Mazeska made a 175,000-share bet on E*Trade Group (EGRP), putting almost all his money into the stock. At $26 a share, Mazeska was convinced, the online brokerage's stock was greatly undervalued. He says it was intended to be a short-term play, but he felt the stock was due for an extended upward run. Mazeska was so sure of himself that he bought half of those shares on margin, as he had done many times in the past, from his broker, Charles Schwab (SCH).
But within days, the stock skidded to $21. Schwab issued a margin call, and Mazeska was forced to sell $200,000 worth of stock simply to cover the loan. Then he got some more bad news: His accountant told him he owed about $500,000 in taxes on his 1999 capital gains. (Mazeska expected to owe no more than $300,000.) Meanwhile, Mazeska kept hoping his E*Trade stock would rebound. It didn't.
"I was down and I wasn't used to that because I had been so successful," says Mazeska. "I was overly confident — I broke all the rules and I should have just sold it all off at once." His accountant, Kenneth Peters, says Mazeska made the mistake of "getting married to a stock" and becoming too enamored of margin buying.
Now, Mazeska realizes that the first thing he should have done in 2000 was pay his 1999 taxes, even if that meant liquidating lots of stock. Instead, he negotiated a monthly installment payment plan with the IRS. But the $30,000-a-month tab proved to be a bit too much, especially when the value of the stocks in Mazeska's account kept sinking. Now he and his lawyers are trying to work out a better payment schedule.
The good news is that things have improved somewhat for Mazeska since December, when his portfolio shrank to just over $200,000 and he was seriously contemplating filing for bankruptcy. E*Trade's stock has risen nearly 95% in the past month to nearly $14, after having fallen to a 52-week low of $6.65 on Dec. 21. Every dollar the stock moves up will make his IRS bill more manageable, since Mazeska still owns about 37,000 shares.
Now, after seeing his portfolio shrivel, Mazeska is duly chastened — and a lot more humble. He's also spending a lot less time trading stocks. Mazeska says he's averaging about a dozen trades a day — still a lot compared to most investors, but not an unusual number for so-called active investors. Some days, he says, he doesn't trade at all. More important, Mazeska says he's adopted a more conservative investing strategy. He's pretty much sworn off buying stocks on margin, and is considering diversifying his portfolio beyond stocks to include safer bets like certificates of deposit, mutual funds and bonds.
And, at least for now, it looks like Mazeska will be able to keep his home and his car. Considering where he's been the past year, that looks like a triumph.
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