To Thread - Here's a perspective worth discussion.
Special Reports
Exposed! The naked truth about Net stocks
Face it: A big score will probably never happen to you. Or me. If everybody has the same lightspeed information then nobody really has an edge.
By Scott Shuger
I just had the coolest chat at make-a-pile.net with this guy phattuesday. Long story short: He knows this guy rebelyell who he's actually met once who used to short time-shares but now day-trades Net stocks. Says he lives over in the Marina, so he's doing alright.
Anyway, this guy -- rebelyell, not phattuesday -- knows about this cool little company that's going IPO in two weeks. As soon as I get the concept out of my mouth you'll know it's the next priceline.com (PCLN). OK, here goes: It's called sock-market.com. What they do is they have contracts with like all these laundromats all over the country to service and clean all their machines. That's basically a break-even business.
But here's the sweet thing: They get to keep all the socks they find! You ever come back from a laundromat with all your socks? My point exactly. And what they do is they wash the stuff -- most of it's already clean anyway -- and they sell it on the Net!
You go into a Foot Locker and you're talking about, say, $6 to $7 for a pair of socks. And you have to go to the mall and park and yadda yadda. Here, it's two bucks and a mouse click. And you can buy singles, man! Word is they're gonna follow up into T-shirts and underpants. Go to their Web page and check it out. While you're there, buy some socks. Anyway the train leaves the station in two weeks and I'm on it. It'll probably be a monster for a coupla hours.
Yeah, sure.
None of the above is true, but I swear it's what 99% of discussions -- at parties, in print -- about Internet day-trading sound like to me. Yes, I suppose some people have quit their straight jobs, gotten a laptop and, after a few months of six-hour days, are sitting on the mother lode. And maybe some of them have no downside exposure because they've closed out all their positions and are just sitting in cash. But the whole subject reminds me of what a comedian once said should be the subtitle of every XXX-rated video: "Great Stuff That Will Never Happen to You."
You're probably not fascinated by day-trading. If you were, you'd be willing to study charts and graphs and resistance levels and SEC filings and annual reports day in and day out for years. Get real.
While a financial discussion with the likes of phattuesday can seem enticing, I can't seem to have one without thinking of another financial discussion I never want to have: The one where I explain to my kid who's just gotten into Harvard that she's gonna have to go to Pensacola Junior College.
Now, I don't think I'm risk averse -- I got married, had a child, like martial arts and scuba diving and I'm even in the stock market -- but I am disaster-averse. And I am not a Luddite: I worked for Amazon.com before you ever heard of it, and I now work for Microsoft doing a job that didn't exist three years ago. But I believe it's best to be involved with the new technology as an employee, consumer or long-term investor. To think otherwise is to become entranced by the advantages of theft over honest labor. So with one caveat, let me see if I can explain why I think that for most of us, Internet day-trading is not the way to go.
The caveat: To see if I could be persuaded out of this line of reasoning, my editor created an Internet-only stock portfolio for me to watch at the time I started this piece, and you'll see how it turned out in a minute.
Forget the dental plan!
A TV spot for E*Trade shows a harried broker cold-calling prospectives while the voice-over wonders, "If your broker is so great, how come he still has to work?" This is the great false equation: Day-trading means not working. Now, I like money as much as the next guy with a mortgage and subscriptions to car magazines, but I'm not fascinated by day-trading, and if you think about it, you probably aren't either. If you were fascinated by it, then you'd be willing to study charts and graphs and resistance levels and SEC filings and annual reports day in and day out for years. Get real.
Since you aren't fascinated, putting in that kind of time would seem like . . . well, like work. And it's the hardest kind of work, because you by and large do it without the help and support of colleagues, without the encouragement of historical precedent and without a dental plan.
And because timing is everything in such matters, it's work that eats into your off time -- work that's hard to really take a vacation from.
Professor Robert Haugen, author of "Beast on Wall Street: How Stock Volatility Devours Our Wealth" and other books, says day-trading done right involves a ton of research. He says he knows of one group of professional day traders who realized profits by going long and short on stocks in pre-assigned pairs. They eventually arrived at a method that was pretty much automatic, but first had to use mathematical methods to figure out which stocks to pair up and to chart their individual price trends. This is not the level of industry exhibited by most ".com" traders.
--------------------------------------------------------------------------------
PairGain surges on bogus report
PairGain employee arrested on fraud charge in stock case
Witness the recent scam by which PairGain Technologies (PAIR) was touted on a fake Bloomberg Web page and as a result moved up more than 30% in a single day on absolutely no real news. The professional analyst who uncovered the fraud did so by doing what the current breed of Web traders apparently counts as heroic research: one click to Bloomberg's Web site and one call to PairGain.
No wonder Haugen says prototypical seat-of-the-pants day traders are "fairly likely" to eventually lose their money. "There's a lot of people who think they know how to make money in the stock market by day-trading," says trader Terry Bedford, who at his Toronto firm Bedford Associates moves in and out of the big Internet stocks for his clients every day, "and I'm here to tell you that it isn't as easy as it's been in the last year and a half."
But even if you are in the tiny minority for whom day-trading would not be work of the most oppressive sort, there is another difficulty that I think for most of us is a showstopper. Now, it's true that what appears to make day-trading a wonderful opportunity is all this unprecedented access to information. Today, little ol' me with my little ol' laptop can get data instantaneously that just five years ago would have been beyond the ken of all but the biggest and most inside Masters of the Universe.
But think it through: Nowadays, the Masters of the Universe are wired, too. What advantage do I have over them now? None. In a stock market where fundamentals don't seem to mean as much as what people think, the enhanced velocity of (pseudo-) information means that, despite all the new media trappings of the day-trading gig, the actual marginal utility of any piece of relevant financial information I might suss out is close to nil. In a profound sense, the contemporary day trader is trapped inside his information; any attempts to break out of the trap, to get information that can be leveraged because it hasn't already been disseminated and digested are doomed, like a man trying to verify the headline on his morning paper by buying another copy.
Right now, Internet day-trading bears the distinguishing marks of classic financial euphoria articulated by Harvard economist John Kenneth Galbraith: the widespread belief that due to some breakthrough circumstance, prices will go up indefinitely, and the reinforcement of this belief by society's most influential economic personalities and institutions. It is alarmingly like all the financial euphorias of the past that have uniformly ended badly. "Right now, AOL has a market capitalization greater than IBM," says trader Terry Bedford. "That gives you an idea about how far things are out of hand."
When the market gets ugly
And how will Internet day traders fare when for the first time, they experience the market moving against them? History would suggest that they will panic, creating such downward pressure that almost all of them will lose their stakes. And by the way, will the e-brokerages be there for them when they're needed? The recent execution stoppages at Charles Schwab (SCH) and E*Trade (EGRP) are not encouraging.
--------------------------------------------------------------------------------
Double or trouble? Check out this portfolio of Internet stock options.
Now, to be fair, just about anything that involves brains and skill can be made to seem impossible. If out of the blue you were to describe step-by-step to a layperson what's involved in open-heart surgery, he or she would reasonably conclude that it can't be done. But I'm more worried about the person whose response upon first hearing about the procedure is to go right home and do one.
Now, about that Internet stock portfolio that my editor constructively gave me on March 19 when I took this assignment. I have to admit that the five stocks he picked -- Yahoo! (YHOO), Amazon.com (AMZN), Ameritrade (AMTD), CMGI Inc. (CMGI) and DoubleClick (DCLK) -- at the time of this writing were collectively up 60%, or about 10 times more than the S&P 500.
The euphoria must be contagious, because I do wish I had bought and held them. Now my editor created a nutty new portfolio of Web stock options for me to watch -- swears they could double by the end of May! Oh sure. In the paradise that is Wall Street 1999, why risk falling out of palm trees when so many coconuts are already at your feet?
|
