Trading Stocks in Quarantine Can Make You Rich, Right?

The good, bad, fantastical, ignorant, and ugly

I know that dude. The dude in the picture.

He’s the guy I overheard the other day in Pan Pacific Park talking to his bud on the phone about a stock. He’s the handful of guys who responded to my recent Instagram story defending Robinhood. (Read my take in this Medium article).

Everyone is a stock market expert now. Everyone is a day trader!

One day, they’ll all move to Hawaii and be in the ocean by 9 a.m. with four figures worth of profit under their belts.

As with the entire Reddit fiasco (and I use the word “fiasco” in its most positive, empowering sense), we must be able to hold competing thoughts at the same time when we consider people who say they have taken up “trading” during the pandemic.

Competing thought set #1

• The increased interest and entrance into the stock market over the last year has been a great thing.
• We’re welcoming a whole new generation of investors.
• We have democratized investing — at least to a meaningful extent with more work to do. (I’ll provide my definition of democratization at the end of this article).
• If you get lucky or just so happen to be good and make some money trading, more power to you.
• And even more power to the Reddit forum for making what happened happen.

Competing thought set #2

• Most people fail at trading. So if that’s what these new stock market entrants are focused on, it likely won’t end well for most of them.
• Trading requires discipline and a sound quantitative plan. It’s not about your gut or some sixth sense of what direction a stock will move.
• Early success breeds overconfidence. Overconfidence bankrupts trading accounts.
• It’s “easy” to trade in a bull market. Reread the overconfidence point.
• Very few of the pandemic-turned-traders had any idea what they were talking about when the Robinhood “controversy” exploded last week.

The friends I have who tell me they’re trading make a point to say they’re only using a small portion of the money they have available for the stock market to trade. They keep a majority of their money in long-term, buy-and-hold, dividend-paying stocks.

I hate to be cynical (because I’m really not) and skeptical (okay, a little), but it’s almost as if they’re trying to convince themselves (and me) that they’re being responsible.

You know how this goes. You have absolutely played this psychological trick on yourself. I know I have. In many areas of life, but we’ll focus on money.

You know trading isn’t the best route for your money. But you do it anyway. You know the best, most sane and logical path is long-term investing. You’re really not doing it as much as you say you are, but you keep saying it because if you say it, somehow, it makes it so.

Think about it. You’re in this bull market. You’re making winning trades. It feels like stocks only go up. You can’t help but believe your own hype. You make yourself believe it’s logical to ride the wave and trade. You’re able to trade on margin. So you lever yourself. You go all-in without even realizing you’re all-in. It feels natural.

You’re winning, until you stop winning. That’s when it gets ugly.

Roughly ten years ago, I stumbled into a day trading chatroom. At the time, I had just started writing about stocks. But I was trying to make it as a trader.

The guy who ran the chatroom is one of the best traders I’ve ever come across. He has a mathematical mind. He has a system that literally removes all emotion from the equation. Company names mean very little to him. He pays attention to things like volatility and the indicators he uses to screen stocks. He has entry and exit targets. He doesn’t deviate.

He didn’t stumble upon this system when he got bored or needed money during a pandemic.

He crafted it, tested it, retested it, back-tested it, and did this repeatedly until he knew he had something.

Bob knows what he’s doing.

After we started chatting, he pulled me aside (virtually) one day and said something to the effect of:

I’ve seen people come and go from this chatroom like you wouldn’t believe. Trading is hard. And I’ll be honest with you, you’re a way better writer than you are trader. You’ll fail at trading, but you have a career ahead of you as a writer.

That’s among the best advice anyone has ever give me in my life.

Around the same time, we came to the conclusion that Bob wasn’t a very good writer, but he wanted to publish some of his thoughts and ideas. So we made a deal.

I’d stop trading and focus on writing. Through this process, I’d help him with his writing. In return (not that he owed me anything), Bob would teach me about options so I could write about them and use them as part of my long-term investing strategy.

That’s among one of the best deals I ever made in my life.

Some of the people who have taken up trading during quarantine need to have some flavor of this conversation and make some variation of this deal.

The Reddit situation has only exacerbated this idea that you too can get rich trading stocks in quarantine. In fact, you might as well just ditch your day job if you have one or not bother finding one post-pandemic because trading can pay your bills and give you the life a “regular job” can’t.

This misses the point.

Trading is a “regular job.”

It’s not something you just start doing.

In fact, it probably takes more work — preparation, time, experimentation, and such — than most “regular jobs.” Sadly, this is not the mindset most people (at least the ones I know and observe) have taken into their somewhat spur of the moment endeavor. An endeavor that likely would have never been if not for the pandemic.

There’s an experience and knowledge base you absolutely need to build up — over time and with intention — if you expect to be a successful trader. As in, somebody who trades stocks for a living or to generate a significant amount of supplemental income absent meaningful losses.

I say this literally, objectively, and with all due respect, but most of the traders we’re discussing in this article enter the situation from a position of ignorance mixed with entitlement, rather than humility meets I’m ready to do what it takes and put in the work.

This isn’t the democratization of investing we’re talking about it.

Trading isn’t investing. But, even if we make the terms interchangeable, democratization doesn’t mean we open up one of the stock market’s riskiest propositions to everyone and anyone. While it might mean, everyone and anyone can do it minus obstacles of the past, it doesn’t mean everyone and anyone should do it.

Democratization means you have better access than you’ve ever had. To some degree, you have more power.

Your world extends beyond index investing and putting your retirement in your employer’s often ill-equipped hands.

Democratization means you have more information than ever at your disposal and, probably most important, you have no or very low commission trades waiting at pretty much every online brokerage. Add low or no account minimums and the ability to purchase fractional shares and there has never been a better time to be a smallish, retail investor than today.

Democratization doesn’t mean you’re a pro. It doesn’t make you a day trader overnight.

Democratization won’t save you from yourself if you don’t use the power it bestows in healthy and productive fashion.