Iâve written many times that day trading is a waste of time. Why? Because regardless of how much experience you have, it is impossible to time the market. After all, what is certain is uncertainty.
But as novice day traders would say, âYou canât live in fear all your life. You must test the waters and if that means going bankrupt in the process, it is worth the try!â
Oh boy.
Trading is what makes investing fun and mysterious in the first place, even though Reddit retail day traders have taken that too literally last week. It is almost impossible to bet on stocks, especially those that are unprofitable and have no foreseeable profitable future that they will go up 1,000% before everyone else will catch them. Even if you did get on the GameStop, AMC, Blackberry train just a tad late, you will be suffering right now as GameStop has currently lost half of its value on Tuesday, February 2nd.
It made sense after all not to get involved so mixed with the eroded anticipation, dear, headaches, wasted money = time, I donât see why not invest long term into growth stocks for a guaranteed profitable return. Focus your attention on more important things. Being patient will vanish volatility right away but most Reddit teens donât have that kind of time, even though they are the youngest traders.
Frenzy Madness
Most day traders have no idea what they are doing. They just like to pretend so with their fancy jargon to act like they âgotâ it until you ask them about their returns and they refuse to show you.
Instead of the typical article where I present you advice that will help you become the smartest, most educated investor out there, we need to also uncover what not to avoid. With money and food in particular, itâs easier to overeat than under-eat so we must be prepared.
Mistake #1: Buying dividend stocks in a high interest rate environment or over growth
Iâm a big fan of growth stocks. These are companies that have high profitability and positive revenue streams which donât pay out dividends because they would rather invest that extra cash to boost their balance sheet and up their enterprise value than give out a pointless 1% thank you.
Low or high interest rate environments, growth stocks are always optimal but with dividend paying stocks, only when interest rates are low, they are a contender. Dividend stocks are typically more stable due to positive cash flow, steady balance sheets and a solid business model but once interest rates peak, they have no incentive in boosting their profits and growing the business to raise the market cap of the firm.
Most people assume dividends are not free money. Yes, they are a great way to earn supplemental income as they are part of my game plan to accumulate just shy of a million by the age of 20, but only earning roughly 2k per year, the average dividend per year isnât enough, especially when youngsters like me can take the risk due to our time horizon being able to make up for the losses if the growth stocksâ potential miss.
Dividend paying companies just donât know what to do with their extra cash so they fake shareholders into thinking it is a generous gift while you could just be invested in 1 growth stock such as Tesla that pays no dividends but have the firm reinvest the retained earnings into itself and allow it to produce more autonomous electric vehicles, better gadgets, tech, etc. to make your money grow exponentially.
High interest rates are the worst for REITs, bonds and dividend paying stocks. Stay away from them as much as you can especially during a recession because that company will have a very hard time growing not reinvesting into its own products, the opposite of what investing really is in the first place.
Mistake #2: Tracking It All Day
Obsessing, timing the market and meticulously watching its every minute move from the trading hours of 9:30 am ES till 4 pm ES isnât going to do anyone a favor, especially yourself.
The worst thing you can do is invest in the short term begging to become rich quick. You have a better shot at winning your local lottery than shorting. Sure, a few people in history out of a million egotistical, mostly men have been successful at it but in the grand scheme of things, you have better things to track than your losses.
The day traders who are successful, a few of my former colleagues included, shared some of their best tips for me which is obvious but ironically hard to do, leaving it alone. Just like with that cut on your arm, the more you touch it, the higher chance it can become infected. Yet, on the contrary, you could argue checking your intraday moves will allow you to not loose too much at one time and get out of that risky trade before itâs too late. Dude, youâre already making a bad decision going for something youâre really not comfortable with. If thatâs your excuse to stay in, youâre better off investing in gold for the next 30 years to make a consistent profit none overnight.
Mistake #3: You follow your gut, never the crowd
Day traders are a unique bunch. Not unique in their creativity per se, but in their personality. They are feisty, courageous and have this scary yet hilarious sense of confidence that they can beat everyone out.
Thatâs not what investing is about. It shouldnât be a gambling game. It is about achieving your goals and how you can best get there through patience and resilience, something day traders enjoy ignoring with no proper education. If you canât handle yourself, you are better off spending 1â3% of fees off your AUM with a fiduciary that actually knows what they are doing than acting high off of the market 24/7.
Mistake #4: Emotions Guide Everything
To day traders, emotions are their best friend. They believe they know more than they donât and believe there is nothing better to guide your decisions than a real mood swing.
More coffee gets them stimulated and as a result, they end up spending more money shorting stocks that only seem profitable.
They love to buy when theyâre joyous and sell when they are scared and fearful of nothing.
âOMGâ and âLetâs Get Itâ are in their daily lexicon as well.
Myth #5: The cheaper the security, the greater the potential
Stocks are lame, they go directly to trading options to take the extra risk. They know they couldâve made 5,000% on AMC shares, but earning 500,000% on AMC options is what true trading is about.
No time to waste and high prices are so last season, or shall I say quarter.
Focusing on low prices are beautiful, especially one that is 2 cents, something they donât have.
Mistake #5: You Thrive off of FOMO
I thought there would be nothing worse than trading off of your emotions.
I was wrong.
Itâs trading based on FOMO and what traders on Reddit fool the whole world into thinking is a good deal.
Everything you do is based off of opportunity cost. Right now you are reading this instead of doing the laundry or exercising. There is a cost to everything but people accept it and move on.
These types of frantic traders believe they need a piece of every pie and as multitasking goes, nothing ends up getting achieved.
Myth #6: Investing in what you know or use
This is still conventional advice that Iâve read in dozens of amateur 101 investing books. Until I tried it myself, it was the stupidest mistake I couldâve made. Sure you might know about Coke and love their toxic sugary diabetes cancer prone product, but that doesnât mean you should invest in them consistently! Just because you love to fly with Delta in normal life doesnât make it a contender these days.
Picking stocks should be simple but not as stupid simple as this. Picking stocks that have a reputation and future is key. To be listed on the stock exchange as public companies, they must have at least 4 quarters(a year) of profitability, positive cash flow, no fishy activity or SEC discrepancies as Robinhood is dealing with currently and preferably be an all year, recession proof in demand blue-chip defensible company. Even though it is crucial for you as an investor to make sure you understand what the company does and how they make money in one sentence, simply checking off that box, isnât going to cut it.
If you want to go an ever safer profitable route, stick with passive investing through ETFs and index funds. Skip the mutual funds, stock picking and day trading through active investing. They sure wonât get you as far.