Article showing what both traders and investors shouldn't ever do

Discussion in 'Investing' started by gtrudeau88, Apr 25, 2021.

  1. gtrudeau88

    gtrudeau88 Active Member

    Dec 8, 2020
    Likes Received:
    I'm not a trader but if I was, this article would be an excellent example of how not to do it

    Points to learn for both traders and investors.

    - these guys played with money they couldn't afford to lose. They had kids to raise and feed and they put they family's livelihood at risk.
    - they borrowed via margin in an attempt to get rich quick without knowing the potential pitfalls. This is so dumb to me. When you take a mortgage out or a car loan, you presumably read at least the key parts of the loan doc before signing, including what happens if you don't make a scheduled payment! These guys were idiots for buying via margin and not understanding what that exactly entailed.
    - Both traders and investors have to exercise some sense of self discipline and this begins with knowing thyself and with being realistic in expectations. These guys had no self discipline. They were thinking of buying expensive cars within a short time of starting out. Foolish!
    - Everybody makes bad trades or bad investments. Every trader has at least one moment of kicking oneself for a poorly timed trade. Every investor thinks at least once "What the hell was I thinking." The fools in the article thought they would nail it every time.

  2. gtrudeau88

    gtrudeau88 Active Member

    Dec 8, 2020
    Likes Received:
    For those who can't access the article, here's the guts of it.


    Chris Garcia set up a second monitor at his desk in mid-January to display his Robinhood Markets Inc. brokerage account. He turned to it often, watching his balance grow to $23,400, more than four times his initial investment.

    Mr. Garcia, a 32-year-old school photographer, made more money in a few days from the market than a month’s work at his day job.

    “What color lambo you buying?” he texted his friends Mike Norkin and Alex Ela, also photographers, joking about market riches delivering six-figure Lamborghini sports cars. “I’m buying three,” said Mr. Norkin, 41. His Robinhood account had ballooned to $52,500.

    After the pandemic disrupted their livelihood taking school photos, the three California friends discovered the thrill of online trading—for a time, making more money than they ever thought possible. They looked ahead to building their savings and paying off debt.

    On a typical day, the three men exchanged at least 50 group texts and held several video meetings to discuss investments. They logged their account balances on a shared spreadsheet. In the evening, they played online videogames together, swapping out usernames to reflect various stocks they liked. They saw other gamers doing the same.

    “When you’re in ‘Call of Duty,’ there’s a rush when you win your match, and you’re doing well,” Mr. Garcia said. “With Robinhood, you’re seeing your account go up, and it’s that same euphoric feeling.”

    Small investors have long been part of the market ecosystem, trading tips at barbershops, in mailed newsletters and through old-school online message boards like Yahoo! Finance.

    The current frenzy, whether in stocks like GameStop Corp. or cryptocurrencies like Dogecoin, is different. Social media and investing-made-easy apps like Robinhood have given new investors a chance to operate in concert with millions of others world-wide. They connect online, much like multiplayer videogames, and drive manias in individual stocks. The Robinhood app logged more than 2.6 million downloads just in March 2020, according to JMP Securities. Robinhood declined to comment for this article.

    Many rookie traders, accustomed to sharing birthday photos and daily online musings, showed few qualms about making investments based on what friends shared in group texts or what strangers posted on Facebook. As much as anything, their investing is a social activity.

    Messrs. Garcia, Norkin and Ela were among the retail traders who, emboldened by early wins and a community of online cheerleaders, took greater risks in a roller-coaster market.

    “Do u have more than 1k on RH,” Mr. Ela texted Mr. Garcia, asking about the balance of his Robinhood account. “If so I recommend using margin.”

    By the beginning of the year, all three friends were amplifying their bets using margin loans, money they borrowed from Robinhood to buy more securities. These loans are typically used by hedge funds and the wealthy. Access to borrowed funds for anyone with $2,000—not the $1,000 Mr. Ela mentioned—is a central feature of the Robinhood Gold account.

    Over eight months, Mr. Ela, 30, poured his savings and big chunks of his pay into the market, about $30,000 in all. Mr. Norkin, who has three young children, invested a similar amount. Mr. Garcia, a new father, funded his account with $4,500 in savings and pandemic stimulus checks.

    It seemed like they couldn’t lose.

    Mr. Norkin was initially wary of investing after losing money on technology stocks and gold many years earlier, he said. At first, Mr. Garcia said he also counted himself a conservative investor. Trading was something his parents, immigrants from Mexico, had never done.

    They shared stock tips in group texts, and, by fall, the friends had a daily routine: At 5:30 a.m., they logged onto Robinhood and discussed potential investments before the market opened.

    The friends were enthusiastic about the electric-vehicle industry and bought shares of auto makers Tesla Inc. and Lordstown Motors Corp. as well as graphite miner Westwater Resources Inc., which produces a mineral for batteries used in electric vehicles. They tried to game the topsy-turvy pandemic economy, buying an oil exchange-traded fund with the ticker GUSH, a bet on rising gas consumption. They dabbled in such volatile stocks as Canadian cannabis firm Sundial Growers Inc.

    Mr. Ela used his Robinhood-issued debit card to tap money from his brokerage account for a vacation to Mexico with his girlfriend. Mr. Norkin and his wife took a road trip to Yellowstone. He introduced her to the trading app, and they picked stocks together.

    With their portfolios rising, the friends egged each other on to take bigger risks as 2020 drew to a close.

    Mr. Ela, the most daring, made 1,600 trades last year, far more than his friends. He joined an investing group on chat app Discord and discussed stocks with strangers, including an X-ray technician in Texas and a journalist in India, almost all bulls. He often made as much as $700 in a morning buying and selling shares during December and January.

    On the morning of Jan. 28, the app didn’t allow Mr. Ela to buy GameStop. He could only sell and trade options. “Dudes some shady s— is happening,” he texted his two friends.

    During trading that day, the stock climbed to a high of nearly $500 a share. Then it nosedived after the buying restrictions kicked in. The friends wanted to buy after the price drop. “We need to sue. This is rigging at its finest,” Mr. Norkin texted. “This is worth a civil war.”

    Robinhood said it never intended to harm customers; it limited the option to buy certain stocks to meet demands from its clearinghouse.

    Mr. Garcia texted a link to a Reddit post describing how to file a complaint with the Securities and Exchange Commission. “Hold the line boys!!!…The whole world is starting to step in and buy GME.” GameStop shares tumbled to below $100 within a few days.

    The friends remained optimistic and continued to muse about spending their gains. Mr. Norkin wanted to buy a house and build his retirement fund after years of pouring money into his business. Mr. Garcia was expecting his first child and considered opening a Roth IRA for her. Mr. Ela planned to pay off his student loans and credit-card debt he accumulated while in college.

    ‘To the moon’
    Mr. Ela read that a SPAC, or special-purpose acquisition company, planned to buy electric-vehicle firm Lucid Motors Inc. SPACs are essentially large pools of cash listed on an exchange. Their purpose is to find a private company, buy it and take it public.

    Starting in January, the friends bought shares of the SPAC, Churchill Capital Corp. IV, or CCIV. Mr. Ela used margin to bet 80% of his portfolio.

    On Feb. 22, CCIV shares spiked in the morning, and Mr. Ela’s portfolio rose to a high of $89,000, about triple what he put in. The deal was announced after the market closed. The SPAC nosedived. Robinhood prevents users from trading after 3 p.m. Pacific Standard Time, leaving the friends powerless to get out.

    Mr. Ela’s 30th birthday was the next day. He checked his account when he woke up and saw CCIV opened down 39% from the prior close—leaving him, on paper, about $50,000 poorer. The plunge prompted Robinhood to ask him for money to pay down the margin loan, a demand known as a margin call. He had to sell stock to make the payment.

    “I just wanna throw up,” he texted his friends.

    Messrs. Norkin and Garcia also took losses on CCIV and other electric-vehicle stocks over the next two weeks. Facing their own margin calls, they realized they hadn’t fully understood the debt they took on. The app prominently features a metric called “buying power” that includes margin. But they had a hard time finding any similar disclosure of what they might owe if their bets on stocks soured and triggered margin calls.

    Mr. Ela, the biggest risk taker, has pulled all of his money from the market and plans to start paying off debt. Mr. Garcia, once the most cautious, put all his money into Tesla, Coinbase Global Inc. and a SPAC run by hedge-fund billionaire William Ackman. Mr. Norkin is hanging onto his positions in hopes they will rebound.

    Mr. Garcia is up close to $700 from his initial investment. Messrs. Norkin and Ela each lost about a third of what they put in.
    Mr. Norkin dreamed about stocks and woke up in the night to check his portfolio. He joined different Facebook groups that focused on investing tips. In January, he sold his Tesla stake for a $14,000 profit.

    The friends bought GameStop that month, when it was below $80 a share. They traded in and out of the stock as it began to climb to improbably high levels. The stock of GameStop and other buzzy companies lifted the trading accounts of Messrs. Norkin and Garcia to personal highs.

    “Yeah, and no idea wth that is,” Mr. Garcia responded, using an acronym for “what the hell.”

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