Playing the Market Has a Whole New Meaning
Every now and then we run into a prospect who at the end of the meeting would ask for a stock tip as a parting gift of sorts. Some of them are self professed punters who fully recognise they are just pandering to their gambling instincts and therefore dabble a bit rather than bet their life savings on it. However not everyone does. The shutting down of casinos during the lockdown coupled with people sitting at home often without much work has driven many a gambler to the stock market. They even punt on bankrupt companies. Robinhood, the online stock trading platform reported that the number of its users who have Hertz shares shot up from next to nothing pre-bankruptcy to almost 1.4m post resulting in Hertz shares rising 5x at some stage. In this piece, Jason Zweig talks about this phenomenon and throws in a few words of wisdom for speculators:
“Las Vegas has reopened, and not just in Nevada. Wall Street also resembles a casino—even more than it normally does. Many stocks, especially of smaller companies in financial distress, have been bouncing around like dice on a craps table.
These moves seem partly driven by people who are flocking to the stock market for the thrill of taking big risks, whether they pay off or not. Such gambling can be fun, but you should never confuse it with investing.
This week, Chesapeake Energy Corp. CHK 9.01% shot up 182% on Monday, fell 66% on Tuesday and 29% on Wednesday, then rose 5% on Thursday. Hertz Global Holdings Inc. rose 115% on Monday, then sank 24% on Tuesday, 40% on Wednesday and 18% on Thursday. Whiting Petroleum Corp. WLL 11.32% soared 152% on Monday, lost 32% on Tuesday and 33% on Wednesday, then gained more than 20% on Thursday before falling back.
Such wild swings are probably powered by individuals trading for short-term kicks and by computer algorithms that pick up on such trades and pile in to ride the momentum. In the old days, the little guy mimicked the big boys; right now, it may be the other way around.
…“They don’t know what they’re doing,…and they don’t care that they don’t know what they’re doing…To them, there’s no sense in looking at a company’s balance sheet or figuring out how to do a discounted cash-flow analysis. They just regard the volatility as an opportunity for fun.”
Jason ends the piece with a few tips for speculators:
..Speculating has some entertainment value. You might learn something useful. There’s even a remote chance you’ll make money. But always know you’re speculating. Also know that you can lose your shirt. Wise gamblers lock their wallets in the hotel-room safe and bring only as much cash to the casino floor as they’re willing to lose. So pick a tiny sum you’re willing to risk—say 1% or 2% of your portfolio. Speculate, if you must, only with that much. Use a different brokerage firm from your regular accounts, to keep any gambling itch from infecting your long-term thinking. Above all, if you get a yearning to join the crowd, think about whether it’s a crowd you want to be part of.”