Why Mark Cuban Compares Today's Market to the Dot-Com Bubble

Today's stock market is starting to feel like the dot-com bubble, according to billionaire investor and Shark Tank star Mark Cuban.

In an interview with Real Vision, Cuban said that it wasn't just the recent rally in the market, but the massive boom in day trading that's reminding him of the euphoria in the markets just before the technology sector crashed. Thanks to easy-to-use trading apps, we're seeing quite a bit of gambling in the markets lately, and it could end very badly.

Image source: Getty Images.

Why are so many people jumping into day trading?

Why are we seeing such a surge in day trading? For one thing, with casinos and sports curtailed the last few months, people haven't been able to gamble through traditional means. That paired with many Americans unemployed, receiving enhanced unemployment benefits and stimulus checks, has given many more disposable income than when they were employed. And finally, the emergence of commission-free stock trading on user-friendly platforms like Robinhood has made it easier than ever to move in and out of stocks frequently.

Another potential reason is that it's quite frankly been easy to make money recently. Since the stock market bottomed in late March, it's been on a clear upward trajectory (until very recently). As Cuban said, "If you're a day trader and you can walk and chew gum, you are making money right now." Traders who bought airlines, cruise lines, hotels, and other beaten-down stocks in particular have had plenty of opportunities for profits.

Why is the day trading boom so concerning?

When the market goes up, everyone can look like an investing genius. And it's easy to get overconfident. One of the most notorious new day traders, Barstool Sports founder Dave Portnoy recently said "I'm just printing money...Why take profits when every airline goes up 20% every day? Losers take profits. Winners push the chips to the middle...I should be up a billion dollars."

Portnoy even went so far as to say that he's better than Warren Buffett, one of the greatest investors of all time. "There's nobody who can argue that Warren Buffett is better at the stock market than I am right now. I'm better than he is. That's a fact."

Well, as Warren Buffett has said, "Only when the tide goes out do you discover who's been swimming naked."

In simple terms, when it's so easy to make money, it's just as easy (if not more) to lose money when the tide turns. Especially if you continuously double down on your winners, as Portnoy suggested.

Consider this list of some of the most popular stocks traded on Robinhood recently and how they've performed over the three-day period from June 10 through June 12 as the market abruptly reversed course:

Source: Robinhood. Performance data from yCharts.

The bottom line on day trading that all new investors should know

I'm not saying that day traders are buying bad stocks. In fact, I own General Electric in my personal portfolio, and Ford is a stock I'm considering as well. Many of the stocks being traded on Robinhood have the potential to be excellent long-term investments.

Here's the point. Long-term investors can handle price swings like those in the chart above. Day traders can't, especially if they're constantly doubling down on winning trades. The mathematics simply aren't in their favor over the long run.

Consider this simplified example. Let's say you are a day trader, and you buy a stock for $10,000. It goes down by 20% today, so you sell and cut your losses and now have $8,000. The next day, you buy another stock, and it goes up by 20%. Your $8,000 is now $9,600 and you're still down. If the same two-day cycle repeats, you'll be down to a little over $9,200, even though you gained and lost the same percentages each day. When you're a day trader, losses really hurt. And this doesn't include the effects of trading with margin (borrowed money), which is extremely common among day traders.

Long-term stock investors don't have to deal with this. If my General Electric stock rises by 100% over the next five years, I really don't care about the path it took to get there. That's the difference between trading and investing, and why the best way to build wealth is to simply find excellent businesses and hold them for as long as they remain excellent businesses, or until you need the money.