|WINNERS AND LOSERS|
September 27, 1999
Business correspondent Paul Solman of WGBH, Boston, reports on the winners and losers in daytrading.
PAUL SOLMAN: In Carlos Rubino's New York cab, it's not just the meter that is raring to roll. There is the cell phone, the laptop computer, and of course the palm pilot, which is about to get a live feed from Reuters.
PAUL SOLMAN: Now is that wireless?
CARLOS RUBINO: It is a wireless modem.
PAUL SOLMAN: It is a wireless modem... so you're getting a signal
CARLOS RUBINO: Satellite.
PAUL SOLMAN: A satellite signal all the time.
PAUL SOLMAN: Why is this 12-year veteran of the New York cab wars so wired? Because he is trading stocks.
CARLOS RUBINO: 24 hours a day.
PAUL SOLMAN: 24-hour-a-day Internet access, so you can make your trades here?
CARLOS RUBINO: Exactly.
PAUL SOLMAN: I see. So you stay on top of the market there, and then you make your trades here.
CARLOS RUBINO: Exactly.
|Trading on the fly|
PAUL SOLMAN: Rubino's last buy was Dell Computer, at $42. He sold at 42 and a half.
CARLOS RUBINO: I made, like, 50 cents. I sold.
PAUL SOLMAN: You made... you mean, it went up 50 cents per share?
CARLOS RUBINO: Yeah, I sold.
PAUL SOLMAN: Now, since Rubino pulls over to make transactions, there's only so much trading he can do in a day. So he's thinking of ditching the cab entirely to trade full-time, and to become that newest and most controversial species of investment creature, the full- fledged day trader. We wanted to know what makes day traders tick, and whether they really make money.
DAY TRADER: Come on, baby, go up.
PAUL SOLMAN: This is Tradescape, a firm of day traders. With reflexes honed on video games, they play the market like it's "Mortal Kombat," and don't let annoying details distract them. When we were allowed to watch, Kirk Kazazian was playing a brand-new stock called Agil. A-G-I-L. What is it?
KIRK KAZAZIAN: It's a new IPO.
PAUL SOLMAN: What does it make, what does it do?
KIRK KAZAZIAN: You know what, I don't know.
PAUL SOLMAN: But you don't know what it does, or what it makes, or who runs it, or anything?
KIRK KAZAZIAN: No. That's correct.
PAUL SOLMAN: But you've been buying and selling it?
KIRK KAZAZIAN: Today? Yes, at least sixty or seventy times.
PAUL SOLMAN: Sixty or seventy times?
KIRK KAZAZIAN: Yes.
PAUL SOLMAN: How have you done so far on it?
KIRK KAZAZIAN: I made money on it. I made some decent money on it.
PAUL SOLMAN: Now the computers at Tradescape keep score, and sure enough, Kazazian was up $29,000 for the day on a personal volume of 518,000 shares in Agil and a few other companies. A fluke? Hey, everybody we met was making money, from the high rollers to the low ones. So you're up $1,800 for the day?
DAY TRADER: Right.
PAUL SOLMAN: I take it. But yeah, you've done a tiny fraction of what he had done.
DAY TRADER: And that's about what I do every day.
|Better than a stockbroker?|
PAUL SOLMAN: Many, if not most of these folks, are former stockbrokers. But Internet technology now lets them trade cheaply with their own money. And are you doing better here than you were doing as a stockbroker?
CRAIG THOMAS: I'm making two or three times as much. And with no stress.
PAUL SOLMAN: No stress? Well, there's plenty while the market's open, says Craig Thomas. But he goes home at 4:00. No more clients carping day and night.
CRAIG THOMAS: I don't have to handle client accounts anymore. Here's what I'm saying, this is what I'm looking for. You see how there's those guys on the bid?
PAUL SOLMAN: Like his brethren, Thomas rarely pries into a company's fundamentals, or even what it does. He simply tries to anticipate what other investors will do, and do it first.
CRAIG THOMAS: These stocks just came down about three points. I'm trying to find a bottom on it, so I can buy some.
PAUL SOLMAN: What is the company?
CRAIG THOMAS: N-T-R-O. I don't know. It's an IPO.
PAUL SOLMAN: All Thomas cares about at the moment is a spasm of selling that might be over. If he buys at the bottom before the crowd does, he explains, he'll turn a profit.
CRAIG THOMAS: I'm thinking if it came down this far, there will be some kind of opening where I can make some money.
PAUL SOLMAN: So the key in some sense is that you are trying to do what everyone else is going to do, except sooner.
CRAIG THOMAS: Right, pretty much.
PAUL SOLMAN: Now if day trading seems a bit short on, oh, substance, the folks at Tradescape insist it serves an important economic purpose: Making markets run more efficiently. More competition has meant lower commissions, they insist...
WOMAN: Buying that at 5 7/8.
PAUL SOLMAN: ...A lower spread between the price being bid for a company's stock, if you are selling, and the higher price being asked for that same stock, if you are buying. Steve Lipson does PR for Tradescape.
STEVE LIPSON: The difference that an individual pays when they buy a stock versus what they are going to be able to receive when they sell the stock, they used to lose maybe 50 cents a share just in the transaction cost to that spread. Now they may be paying 25 cents, maybe even less. And that's their return, in their pocket, and it's due to the competition that the market makers face from the activities of day traders.
PAUL SOLMAN: So if you are wondering who's been losing while these guys are winning, well, the day trading line is, Wall Street, its market makers, and brokerage firms. But that can't be the whole story. Says MIT Finance Professor Andrew Lo, a lot of the losers are day traders themselves.
ANDREW LO, MIT Sloan School of Management: There are statistics that show that on average, if you take a look at the day traders, maybe something like 10 percent or 11 percent of the day traders are actually profitable, which means that the rest of the crowd, the 89 percent, are losing money, on average.
PAUL SOLMAN: Tradescape's response? That its traders-- the experienced ones, at least-- have a much higher success rate, according to an internal study.
OMAR AMANAT, CEO, Tradescape: Many of the traders who have made it through a learning curve past three months to six months are in fact... over 50 percent of them have been profitable. And... but again, that data has not been released, and we will...we are looking forward to releasing some of that into data.
PAUL SOLMAN: Now, even if these numbers are true, it still means that almost half of all day traders are losers. So who and where are they? Well, we figured maybe there would be amateur day traders who outnumber the pros by something like 50 to one. But Carlos Rubino was making money. And so was the one at-home day trader we profiled back in February, Lynn Harvey.
LYNN HARVEY: I made more in January than I made all year last year.
PAUL SOLMAN: Why do I keep meeting the winners?
ANDREW LO: Well, I suspect that the winners are the ones that are most vocal, the most visible, and are obviously the ones that have a great deal of enthusiasm for the activity. The ones that are losers are probably not likely to make a big deal of it.
PAUL SOLMAN: This is a recurring theme in finance, says Andrew Lo: Survivor bias.
ANDREW LO: This is much like the bias that we see when we ask people whether or not they voted for Richard Nixon in the second election, the landslide victory, where nobody seems to have voted for him after the fact.
PAUL SOLMAN: People don't want to admit voting for Nixon, says Lo, and...
ANDREW LO: They don't want to the admit that they've lost a great deal of money. It's a personal embarrassment. It's a sign of, I guess, weakness, or defeat.
PAUL SOLMAN: So the point is, no day trader who is losing money is about to let us in with a camera.
ANDREW LO: That's right.
PAUL SOLMAN: In fact, day trading losses can be devastating. When day trader Mark Barton lost half a million dollars in Atlanta earlier this year, he allegedly snapped and went on a killing spree. So there are losers, big ones. But Tradescape CEO points outs that unfortunately, tragedies can happen in any risky business.
OMAR AMANAT: This is also a career that by its very definition has its ups and downs. So certainly that is... that can be stressful for many individuals who are either too emotional or not as stressful for people who aren't as emotional.
PAUL SOLMAN: Our last stop was the apartment of Alexander Elder, a Russian émigré psychiatrist-- he jumped ship in 1974-- who went on to become an investor, and has written the day trader's bible, "Trading for a Living." He too thinks camera crews like ours don't see the whole picture.
DR. ALEXANDER ELDER, Psychiatrist: This is... the question of profits or losses are tremendously sensitive, personal questions. I mean, till you see accounts, you cannot believe a word that you are saying-- that you are hearing.
PAUL SOLMAN: Dr. Elder's business these days is analyzing investors, and he says most of them are losers, and he knows why.
DR. ALEXANDER ELDER: What happens to most people is that when they start making money, they get so wonderfully happy about it, that they lose all sense of caution, and they start taking stupid trades. And then they lose money, and then they become scared. And then the guy who is scared is sitting in front of the screen with a trigger finger like this.
PAUL SOLMAN: Now Elder doesn't think losing is inevitable-- far from it. In fact, he says, if you understand how most investors can behave, you can win by betting against them. You study lots of charts that depict crowd behavior doing technical analysis, instead of focusing on a firm's fundamentals. Understanding the crowd's psychology leads to the hardest job of all, he thinks: Understanding your own.
DR. ALEXANDER ELDER: It's all about discipline. It's all about increasing your percentage of winners. It's all about keeping your losses small.
PAUL SOLMAN: Disciplined enough to take your winnings and get out, or cut your losses and get out.
DR. ALEXANDER ELDER: Right. Not get too greedy. You have to cut short your own good streaks, and you have to accept your own losses.
|Psychology and the market|
PAUL SOLMAN: MIT's Andrew Lo doesn't disagree. He has written a book that suggests the stock market isn't random, can be beaten, and that psychology plays a crucial role.
ANDREW LO: I think the comparison that I like to make is the difference between a professional gambler and a compulsive gambler. A professional gambler is somebody who understands all the odds, who knows how to make these calculations and tradeoffs between risk and reward, and is extremely disciplined in how they make their bets. A compulsive gambler has a need for the kind of stimulus that gambling provides. There is nothing refined about that need. It is an addiction, much like an addiction to a substance, and so the question of whether or not day traders are more like compulsive gamblers or professional gamblers can explain the difference between financial ruin and financial success.
PAUL SOLMAN: So only day trade if you can play poker really well?
ANDREW LO: Absolutely.
PAUL SOLMAN: In the end, then, it may be no wonder that the traders one sees on TV make it look easy. They're the ones who play the game best, the ones who, like Alexander Elder himself, do seem to be able to out-psyche the crowd. And when a New York taxi driver makes money at the game, you can bet he is not your usual cabbie.
PAUL SOLMAN: You seem to be about the happiest cab driver I've run into in some years.
CARLOS RUBINO: Yeah?
PAUL SOLMAN: Yeah.
CARLOS RUBINO: It's your lucky day.
PAUL SOLMAN: Yeah, well, maybe it's your lucky day. Let's see. Not surprisingly, Carlos Rubino was still way ahead of the market when we left him, another of day trading's oh-so-visible winners, which is probably why we wound up in his cab, recording, as usual, the exploits of another very unusual investor.