Is it time for a new approach?
by Phil Weiss
TOWACO, NJ (July 10, 1998) -- Here in the Cash-King Portfolio, we often talk about how one of the biggest advantages about being a Cash-King investor is not having to focus on the short-term. We really do buy stakes in businesses here, not just stocks, and we hope to hold our ownership position in them for at least a decade. The longer we can string out market-beating performance, the better -- since with each passing day, we defer tax and commission costs.
However, I do confess that I've occasionally wondered how day-traders spend their days and whether there mightn't be a way to make a few quick bucks on a few quick trades -- and have fun in the process. I also always appreciate the opportunity to learn something new about our public markets. So, when I heard about an inexpensive, three-hour introductory course on day-trading that was being offered by the Learning Annex in nearby New York City, I decided to go for it.
Tonight I'm going to share some of my experiences from that course with you.
The class started off pretty well, with a number of points that didn't directly conflict with my general thinking about investing. For instance, the instructor, Gary Roth of Equity Trading, LLC, who has 35 years of trading experience, said that he follows stocks that have been gaining ground. He also stays with safer stocks, well-known companies, the popular names. Further, he believes it is much more important that you follow the right stocks than that you worry about the market's overall direction. Quality will take care of itself in time. Finally, and most importantly, he said that he carries out all of his own research.
That almost sounds Foolish.
Ahh, but how temporary was the bliss!
We then learned how, when you day-trade, all you should care about is the price movement of the stocks you're following. You needn't concern yourself with the qualities or merits of the business and its products. After all, public companies are all pretty much trying to make the same thing -- money. For the day-trader, what the stock market is saying about a company's share price is much more important than its business development.
"Watch the stock, not the business" -- that was the advice.
We then learned that what actually matters most to the day-trader is having access to what are called Level II Quotes -- which provide immediate information about bid-ask spreads in the market. If you have access to Level II Quotes, you can see which brokers are bidding on a stock, how many shares they wish to purchase, what price they're bidding for the stock, and who the market makers are for that stock. The Level II quote information helps you to act quickly. That's one thing that a day-trader apparently survives on -- speed.
Okay, now I'll go through a specific example of what can be done with this information, according to our instructor -- hold your breath, else you get dizzy (skip two paragraphs down if you can't handle it!):
Say that the bid price on ticker symbol JHIL is $10 and the ask is $10 1/8. You first buy 1000 shares at a limit price of $10 1/8. On a small stock, the bid will then likely increase to $10 1/8 and the ask to $10 1/4. If the bid price does increase, you quickly buy another 1000 shares at $10 1/4.
The purpose of this buy is to help drive the stock price to $10 3/8. Once the stock gets to that price, you can then sell 500 shares at $10 3/8, booking a quarter-point profit on the shares you purchased at $10 1/8. Then, if the stock doesn't drop on your sale, you can sell the rest of the shares and take your profits. That's all you're really looking to do -- grind out eighth- and quarter-point profits minute by minute. (At this point, I began imagining myself betting on coin flips by the hour.)
All this isn't easy either. Mr. Roth's typical day takes him to the office between 7:15 and 7:30 in the morning, where he sits at a computer screen for the day. He explains that the trading room that he works in is rather quiet. You can hear CNBC and the like on TV, but there is little in the way of conversation among the brokers -- there are few interruptions to your work.
At one point Roth said, "Once trading has begun, I don't leave my computer for a second. I don't take lunch. I don't even go to the bathroom." Too much information? You be the judge. But, wow, talk about a tough day. I thought being a tax accountant heading into April was rough -- but there I was eating lunch, talking to my colleagues, letting nature run its course. Work was intense, but life was life.
Now not every day trader is as gung ho as Mr. Roth, but he said that most traders at his firm hardly leave their computers except for a quick bathroom break. Finally, at around 5:30 p.m., Mr. Roth calls it a day and goes home with blips and squiggles from his monitor racing in his head. Money made or lost.
After sitting through the 3-hour course, I ended up with many more questions than answers about why someone would want to subject herself to day trading. It sounds like a solitary, intense job. And, as there was no focus on accounting in the course, I kept wondering if these approaches -- once all commissions and short-term capital gains taxes were deducted -- were beating a simple index fund. I, of course, doubted very seriously that they would beat the Cash-King portfolio over time.
One of the scariest moments to me in the class came toward the end, when the instructor asked whether or not the attendees had a brokerage account. I was shocked to learn that some of the attendees hadn't ever invested before. This strengthens my resolve to get everyone in America into Fooldom to read our 13 Steps to Investing Foolishly and 11 Steps to Cash-King Investing -- no matter what course they take after reading those. The mix of common-sense personal finance thinking with logical, inexpensive, and trackable investment approaches now seems so critical. And they only take an hour to read.
In the meantime, I plan to stick with investing in businesses and rooting for their improved performance. Mind you, I do track my portfolio each day. But the day-trading class only strengthened my resolve to quote my stocks frequently but not to trade them. For Cash-King followers, you can always quote our full portfolio by clicking: CK Portfolio Quotes (bookmarking it on your browser and reloading or refreshing it for updates). I did a few times today -- and how sweet it was to watch the Gap continuing its ascent!
I hope everyone has a terrifically, Foolish weekend. I plan to have a good deal of fun as I'll be helping my son celebrate his first birthday tomorrow.
Stock Change Bid ---------------- AXP +2 1/2 116.81 CHV + 3/4 81.88 CSCO - 1/16 92.88 KO + 1/2 87.19 GPS +1 3/4 66.38 EK - 13/16 73.56 XON --- 71.75 GM --- 71.19 INTC --- 79.75 MSFT +2 3/16 113.13 PFE +2 13/16 118.00 TROW + 9/16 40.06
Day Month Year History C-K +1.12% 4.33% 18.99% 18.99% S&P: +0.50% 2.69% 16.28% 16.28% NASDAQ: +0.17% 2.55% 17.55% 17.55% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 113.13 44.53% 2/3/98 22 Pfizer 82.30 118.00 43.38% 5/1/98 37 Gap Inc. 51.09 66.38 29.92% 2/27/98 27 Coca-Cola 69.11 87.19 26.16% 2/6/98 56 T. Rowe Pr 33.67 40.06 18.97% 5/26/98 18 American E 104.07 116.81 12.25% 6/23/98 23 Cisco Syst 86.35 92.88 7.56% 2/13/98 22 Intel 84.67 79.75 -5.82% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 73.56 16.49% 3/12/98 20 Exxon 64.34 71.75 11.53% 3/12/98 17 General Mo 72.41 71.19 -1.68% 3/12/98 15 Chevron 83.34 81.88 -1.76% Cash-King Stocks Rec'd # Security In At Value Change 5/26/98 18 American E 1873.20 2102.63 $229.43 2/3/98 24 Microsoft 1878.45 2715.00 $836.55 2/3/98 22 Pfizer 1810.58 2596.00 $785.42 5/1/98 37 Gap Inc. 1890.33 2455.88 $565.55 2/27/98 27 Coca-Cola 1865.89 2354.06 $488.17 2/6/98 56 T. Rowe Pr 1885.70 2243.50 $357.80 6/23/98 23 Cisco Syst 1985.95 2136.13 $150.18 2/13/98 22 Intel 1862.83 1754.50 -$108.33 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 15 Chevron 1250.14 1228.13 -$22.02 3/12/98 20 Eastman Ko 1262.95 1471.25 $208.30 3/12/98 20 Exxon 1286.70 1435.00 $148.30 3/12/98 17 General Mo 1230.89 1210.19 -$20.70 CASH $94.76 TOTAL $23797.01 *The year for the S&P and Nasdaq will be as of 02/03/98