Monday, September 20, 1999

Day Trading 101?


During a break in my class last night, I happened upon some friends who were on a break from another class. They were all huddled around a computer checking the latest stock prices. It seems that they were in Securities Analysis and one of their group assignments was to track a stock during the semester and comment on its performance.

One of them yelled, "Woo-hoo, it went up $23 dollars per share today, we picked a winner!" I suddenly wondered what they were learning in this class. Let's forget the fact for a moment that it would look to an outsider that their class seems like Day Trading 101. When they told me $23 per share it made no impression on me. I didn't know what stock they were talking about, so I had no frame of reference to know whether $23 was as phenomenal as they thought it was. My immediate reaction was "So, what's your point?"

As a short exercise to disprove their emotion about $23 being a large jump, I asked them to key in Berkshire Hathway (NYSE: BRK.A). It dropped $300 on the day. Now, that's a big jump compared to $23. It really wasn't, though. They had no perspective when looking at absolute numbers. It turns out that the $23 gain was a large percentage gain, while the $300 drop was a tiny fraction of a percent.

I hope somewhere in Securities Analysis they discover perspective in the way they look at stocks. It's the percent change that really makes a difference, not the absolute change. Every Fool knows that.

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