Know-nothing Investing

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Over the last several quarters we have seen an increase in market activity by individuals who seem to take pride in how much they don’t know about the stocks they are trading.  This is not investing.  Perhaps it is trading, wagering or just plain “rolling the dice.”

Over the short run, this may not be as stupid as it seems.  Markets tend to go up, and over the last 12 months, stocks have gone up a lot, for example, more than 60% of the stocks in the Wilshire 5000 have a positive total return for the period.  If you look at know-nothing trading as an alternative to gaming, the odds have favored traders on the long side.  Moreover, traditional games of chance are almost certain to produce negative returns because of the cut taken by the house.  Lottery tickets typically pay out approximately 65% and other games of chance, casinos, sports-betting websites, race tracks and others, also pay out less than 100%, after the house vigorish.  Stock trading, through commission-free firms, offer a much better theoretical return opportunity.

If this something you want to do, in lieu of gambling, ok.  But keep it small, relative to your resources, and do not use borrowed money.  Margin calls can be hell and may result in financial ruin.

Investors, as differentiated from traders, are likely to benefit, over time, by building and maintaining a portfolio designed to meet their personal financial objectives.  Since evaluating investment opportunities is hard work and portfolio decisions can involve increasingly complex tax and other regulatory considerations, it may be helpful to stay in touch with your advisor(s).

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®

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