Gamblers

Folks are worried about stock trading. Specifically, too much of it.

A nebulous adage cautions against “too much of a good thing.” But I’m not sure that old saw is applicable here.

Depending on your circumstances, trading might not be a “good” thing in the first place. I’d argue that most investors would be (far) better off minimizing their trading. Indeed, there’s a very real sense in which you can’t be an “investor” and a “trader” at the same time. Those are two distinct types of market participants. It’s not clear you can be both.

Obviously, the world needs professional traders. They serve a variety of purposes in a variety of contexts. What’s less clear is whether the world needs individual traders.

Let’s be honest without ourselves. Individual traders, no matter what their background and no matter how experienced, are just gamblers. Self-directed investors building a portfolio for themselves and actively hedging that portfolio is one thing. But there’s a fine line between that and a gambling addiction.

Show me someone who actively trades for their own account on a daily basis, and I’ll show you someone who, in a parallel universe, is on a first-name basis with a local bookie. It’s just that simple, folks. It really is. And that’s one reason why people were passing around the chart (below) on Friday.

There’s nothing particularly novel about the visual. Bloomberg ran a version of it (theirs was juxtaposed with the VIX), noting that “over the last 20 days, an average 15.8 billion shares have traded each day on all US exchanges… just below the 16.1 billion average hit on March 25, which was the highest in at least over a decade.”

The linked article is short and predictable. It ties the trading “explosion” to retail activity. The same retail activity evident in options markets. The same retail activity that drove the GameStop trade. And the same retail activity that’s now the subject of a multi-agency federal investigation.

I’ve spent plenty of time documenting the pitfalls of inexperienced investors speculating in shares of companies with sometimes bleak financial prospects. I’ve doubtlessly irritated some folks in the process. The charts (below, from Goldman) hint at the growing footprint of retail activity in the market.

But I want to ask a different question on Friday. While it’s all too easy to indulge in humor at the expense of first-time market participants who bought GameStop at, say, $350, only to lose most of their investment, what’s the actual difference, at the end of the day, between that, and someone with years of experience who puts on a comparatively complex trade wagering a much larger sum in the process and losing money?

Is the latter “better” than the former? If so, why? Because “experience”? Or, even sillier, because the initial amount wagered was large? How does that make any sense? “My losing bet was smarter because I gambled $25,000 instead of $350.” No it wasn’t. Arguably, it was stupider. Almost 72 times stupider, in fact, if you lost all of it.

Of course, if you’re wagering $25,000 or more on single trades routinely and have a screen full of such trades that together sum to, I don’t know, a couple of million, you’re not getting wiped out on all of them. And you’ve doubtlessly put them on in a manner that limits your losses. In that respect, you are, in fact, “smarter” than the Redditor. And you’d better be. Otherwise, you won’t be a millionaire for long.

But you’re no less a gambler. In fact, you’re more of a gambler almost by definition. And you might be addicted. As I alluded to in “The ‘Revolution’ Robinhood And Reddit Are Looking For Happened Years Ago,” it’s not clear why people with sizable sums of money which, if invested in a simple portfolio, could generate meaningful income even in a world generally devoid of yield, feel the need to trade daily.

It’s amusing (to me anyway) that so much digital ink is spilled lampooning the Reddit crowd and those trading on Robinhood when the only difference between them and a “real” trader is the choice of platform, level of experience, and account size.

I grew up around a small-town bookie. His son was my best friend early in life. The book was just a part of it. The family business had all the usual trappings. There were car washes. Three of them. There were vending machines. Dozens of them. (Sometimes, he’d pay us $20 each to walk up the street and work the oldest ones — the ones with the loose candy and manual hand cranks.) There was also a hair salon. And there were businesses that paid out monthly to my friend’s father, although it wasn’t clear what services he was actually providing.

This was long before anyone could even conceptualize of streaming sports content. Households didn’t have flatscreens. Instead, we watched a collection of bulky TVs all hooked up to as many paid premium sports channels as it was possible to get at the time. My friend’s father would pace around the room, cursing occasionally at this or that game.

Come Monday and Tuesday, a predictable procession of locals would drop by, ranging from regular people to politicians to police officers. The officers would smile at us and ask about school. Then they’d walk up the flight of carpeted stairs and down the hallway. I can still remember the number of footfalls it took to get from the top of the stairs to the master bedroom. One, two, three, four, five, six, and then “Hey, bud,” from the bedroom. “Tom.”

As we got older, maybe 13, he taught us a little about the business, from the house side. There were a couple of people whose action made him nervous, both because they were savvy and bet big.

It really didn’t matter. There would be bad weeks, yes. But there were rarely bad months. And there were no bad years.

Sometimes, the folks who came by were collecting. Not usually, though. Mostly, they were paying. And even if they were collecting, they’d need a car wash eventually. Or a Pepsi. Or a cheese danish. Or something else entirely.