The Day-Trading Boom and Why It's So Concerning

Recently, billionaire investor Mark Cuban compared the current stock market to the dot-com bubble of the late 1990s. The reason? Easy-to-use trading apps, commission-free stock trading, and a lack of other ways to gamble right now have led to a surge in day-trading activity.

In this episode of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss why day trading can be so dangerous, and what investors should consider before trying it. Plus, they discuss why they're watching EPR Properties (EPR -0.21%) and Shift4 Payments (FOUR -3.39%) this week.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on June 15, 2020.

Jason Moser: It's Monday, June 15, I'm your host Jason Moser, and I'm joined today, of course, by the one, the only, certified financial planner Matt Frankel. Matt, how is everything going?

Matt Frankel: Pretty good. It's a little rainy outside, but we had a really nice weekend; hopefully, you guys did as well.

Moser: Yeah. Yeah, you know, it was a nice weekend up here; it was good weather. We officially entered phase two here in Virginia, Northern Virginia included there. So, you're starting to see some more businesses open back up, a little bit more activity. And you know, it's been nice to see too, I think, people still taking smart precautions up here. I mean, it is one of those things where we can take the precautions we can take, but I do notice wherever we go that there do seem to be a lot of people wearing masks and being thoughtful of trying to maintain distance, and that's nice to see. I think we're going to be dealing with this for a little while. And you know, shutting down the economy, like we once did, isn't really going to be an answer, I don't think, going forward. So, it's nice to see people being thoughtful about it.

I don't know how it is down there in South Carolina, but I'd imagine given that Southern hospitality, everybody is pretty OK with that too, right, everybody looking out for each other down there.

Frankel: Yeah. Well, our case numbers are going up a little bit, but I mean, that's to be expected. We're I think in, like, phase five or six for [laughs] reopening. So, if it's a new plateau, it's OK; if it's a spike, then it's bad; and it, kind of, we don't know yet which it is.

Moser: Yeah. Yep, it's tough to make full sense of it, but you know, we just keep on doing what we can do one day at a time. And we get a little closer to putting this behind us at some point. But let's not talk about that, let's talk about what we're here for, and that is the Financials show, Industry Focus: Financials today. And on today's Financials show, we're going to dig into an article that you recently published, Matt. It's titled, Why Mark Cuban Compares Today's Market to the Dot-Com Bubble? And I thought this was interesting from a number of angles.

And, you know, we were also very fortunate to have Mark Cuban recently join us for FoolFest, right, the virtual FoolFest that we had. We had Mark Cuban on there as an interview. And we actually had, sort of, an editorialized version of that interview posted on Motley Fool Money, as the interview this week, a little bit of an abridged version.

But, you know, he's an interesting guy from so many different perspectives. Obviously, very smart, a great entrepreneurial mind. And I enjoyed reading this article that you wrote, Matt. And I think that really what struck me was just this idea that we're seeing this big surge into day trading; and we'll get to that. But talk to us a little bit, first, about what Mark Cuban is seeing out there? This was from a different interview, but this is an interview nonetheless where he's comparing the exuberance today to the dot-com era. Tell us a little bit about what he's seeing.

Frankel: Well, for one thing, Mark Cuban does have a very unique perspective on the dot-com bubble. If you remember, that's when he made his fortune. He sold his company Broadcast.com to Yahoo! at the height of the dot-com bubble. I think it was $5.7 billion they got for it.

So, he knows all about [laughs] what he's talking about. So, what he said is that the recent boom in day trading, and just kind of the easy money he sees being made really reminds him of, kind of, the euphoria in the market around the time of the dot-com bubble in the late '90s, and we all know how that turned out. So, it just became so easy for people to get involved in the stock market, especially -- and I'm not talking down on Robinhood here. I think Robinhood is an excellent trading platform for those who use it correctly.

The problem is that platforms like Robinhood -- and it's not the only one, but platforms like Robinhood and even Square's investment product is another one -- they're designed to make it very, very easy for people to trade stocks but not to invest in them. In other words, Robinhood doesn't give you access to educational tools the way a TD Ameritrade would or, you know, stock research like an E*Trade or Ameritrade would. But it makes it very, very easy for free to just hit the button and trade stocks, even if you want fractional shares or things like that.

So, it's become very easy to trade stocks. We've seen big volatility, which is a "traders' market," you know, like, there was a time when airline stocks were going up 10% to 20% a day for a couple of weeks. So, there's definitely money to be made, but I don't know if you've seen recently, there's that high-profile day trader, who's [laughs] a very recent day trader named Dave Portnoy ...

Moser: [laughs] Yeah, I made note of him in the show notes here, because that was one direction I wanted to take it. I want to ask you about that -- "Davey Day Trader Global," I guess is what he's coined it. And, I mean, listen, he's a funny guy. He heads up Barstool Sports, I guess, where he is one of the guys who founded Barstool Sports.

But with the sports industry basically shutting down, I mean, he's kind of taken this approach to, sort of, an alter ego in this Davey Day Trader, [laughs] which, it's funny, but by the same token, you know, there are going to be people who maybe don't have the experience investing. They're going to see what he's doing and think maybe there's something to it, and then try to mimic what he's doing. And that's probably not that great of an idea from what I'm seeing.

Frankel: No. And he's saying things like, "I'm just printing money here," you know, "Losers take their profits, winners push all their chips to the middle." That is the most dangerous investing advice I've ever heard. [laughs]

Moser: That's just the opposite of what we try to teach here.

Frankel: Right. And we're not trying to teach people to, like, take profits as soon as their stocks go up, but we also don't double down, don't invest more than you can afford to. People are investing on margin a lot, which is really where it gets dangerous. And a lot of the day trading, it's happening in a lot of these really speculative stocks right now that you're just seeing these big up-and-down moves in every day. And it's just dangerous advice and it's not what we want, it's not what we're about, it's not the way to make long-term money in historic context.

Day traders get killed. I mean, save for a few professionals actually working on Wall Street, day trading is usually not a profitable business.

Moser: No. And I'd tell you, to your point there, I have noticed on networks like CNBC, in particular, and I'm not trying to call them out, but I mean, the facts are the facts. I mean, they do have him on there a lot. And again, I know there's an entertainment angle to this, I get that. It's a bit tongue-in-cheek, but by the same token, we have to remember there's a big audience out there, and some people might not necessarily get that. And so, you really do have to be careful of the message that you're communicating, you know, because even if that's not the intention, sometimes it can have that effect.

And in regard to day trading itself, you know, in the article that you wrote, there was a really good paragraph in there, where you laid it out in numbers. And I thought it would be great if you could go through that example for our listeners today, just to kind of put your point in numbers, so that people can understand exactly where you're coming from, and the trouble with day trading and why it's so hard to actually sustainably do well in day trading.

Frankel: Sure. So, think of it from a percentage point-of-view. And here's a kind of math problem I would pose to the listeners. Let's say that you own a stock and it goes down by 20%. So, you sell to cut your loss, you say, I'll trade again tomorrow and try to make my money back. Tomorrow you buy another stock and that one goes up by 20%. You might think that you're back to even, but that's not the case. Mathematically, the percentages on losers hurt a lot more than the percentages on winners help you.

For example, let's say you have $1,000. You lose 20% tomorrow, you're down to $800, right? So, tomorrow if your stock goes up by 20%, you buy it again. You know, you cut your losses at $800, buy it again. If that goes up 20%, now you're up to $960, you're still down by $40 in that simple example.

So, the point being, when you lose money and cut your losses, then try to get back in the market and do this over and over again, the losses really outweigh the winners even if your percentages are the same. You could lose 20%, make 20%, lose 20%, make 20%, repeat this process for weeks, and go broke.

So, the mathematics aren't in your favor. It used to really not be in your favor when you were paying commissions, but even now -- a lot of people think, "Oh, well, it's free to trade, so now it's kind of a level playing field." And that's not the case. It's more of a level playing field for long-term investors, because if you're a long-term investor, you don't care that your stocks are going up and down by 20% each day. It may be making for some interesting television, but it really doesn't have anything to do with your long-term returns.

Moser: Yeah. And you mentioned how today -- I mean, obviously, we live in a commission-free world or essentially commission-free for the most part, and that's fine, that's good, we like that. But I mean, when it comes to day trading, you're still subject to the taxes, right, on any of those gains, any of those winners. I mean, you're going to be subject to the taxman. And with day trading, when you're making many, many transactions, I mean that only, that tax bill adds up over time. And so, I don't know that, necessarily, a lot of people actually consider that part of the equation either, because of the difference between short-term capital gains and long-term capital gains. And long-term needs to be greater than a year -- hold [a stock] greater than a year and you are subject to long-term, but a year or less, and it's short-term capital gains. Those short-term capital gains [taxes] are a lot higher.

And if you are fortunate enough in a day-trading profession to actually make money, you still have to pay a lot of that back [laughs] in taxes. And if you don't do that, obviously, they will come after you and they'll get that money. So, it does seem like the deck is really stacked against you. You've got to get -- there are a lot of "ifs" that come into play when it comes to day trading, and you've got to get all of those "ifs" right. Whereas, if we talk about taking the longer view, those "ifs" start to go away after a while. they become less and less relevant to us as longer-term investors.

Frankel: Right. And when you consider that mathematical example I mentioned a minute ago didn't even include if you're trading on margin -- that's where you really get into trouble. Here's a quick math problem.

Let's say, you buy something with 2:1 leverage -- meaning that you have $10,000 in your account and you spend $20,000 to buy stock.

Moser: And that means you owe an additional $10,000.

Frankel: Correct. What happens if your stock loses 50%?

Moser: [laughs] You probably get a margin call.

Frankel: Well, yeah, you would probably get a margin call, but if you didn't, you'd go broke. You would have zero. So, margin really amplifies your losses to the point where they can literally devastate and destroy your entire trading account. So, a lot of people don't understand this, especially if margin comes very easy like it does on some of these apps, where it doesn't even -- you know, you should at least have some kind of disclaimer window that pops up, says, "Hey, you're about to borrow $10,000 to invest. Are you sure you want to do this?" But a lot of times it doesn't even do that, even with the big brokerages. I mean, I use TD Ameritrade, and I can type in a stock order that's for more money than in my account and it just does it. So, it gets really dangerous. I feel like something needs to be done with margin especially.

Because, I mean, if you remember the crash of '29, that was a margin-fueled event, and I would actually go so far as to say this is more like the Roaring 20s than the dot-com bubble when it comes to people borrowing on margin and the trouble that can get you into.

Moser: Yeah, that's really scary to think about. Just for context, I've been investing for a lot of years. I mean, I've been here at The Motley Fool for more than 10 years now. I never use margin. I never have used margin, and I never will. I mean, personally, I don't need it. It's not something I need to incorporate into my investing philosophy.

Now, if you're into options and shorting, then you're going to need margin to be able to facilitate those transactions, but, you know, there are costs that come with it and it takes a lot of control out of your hands. And I'm not going to say, "If you get something wrong," I'm going to say, "When you get something wrong," because as investors, we know, you and I know, Matt, it's not a matter of if, it's a matter of when, right? We're not batting 1,000 as investors. No investor is.

Frankel: Right. And I mean it's really tough to make the case in favor of day trading, just for all those reasons you said. I see a bunch of tax issues. So, you can write-off losses, but if the average trader, you know, moves in and out of stocks a 1,000 times a year, how complicated does that make your tax situation?

Moser: [laughs] I can't even begin to imagine. And I've made it before, like, a New Year's resolution, I'm not the biggest New Year's resolution guy. But yeah, I think a good New Year's resolution is to make the commitment to yourself that you're not going to sell any stocks. And you know, it's actually not that difficult to do if you invest the way we do. I mean, if you take that longer-term mentality and you focus on investing in the business itself and not the stock, the more investments like that you get in your portfolio, the less, really, selling comes into play and you actually could make it through a year without selling at all.

Now, you know, one factoid I did see, before I get to the question here, just back in regard to Dave Portnoy and the impact he has had on the audience here in the investing community. And I just noticed, but Penn National Gaming, which is one of the companies, that's a company that took a big stake in Barstool Sports recently, for those who don't know. Penn National Gaming stock is up 184% since March 23. I wonder how much of that is just, like, Barstool and Portnoy fans who are just, kind of, jumping into the mix there and buying, you know, pushing a little bit of that valuation up.

I mean, we've certainly seen casino stocks, gambling-related stocks, they really took a big hit when the bear market really, really dug into us. And so, those companies, those businesses, certainly, they were able to recover a little bit here since, you know, we've started to come out of hibernation here and we're opening things back up. But I still feel like maybe there's a connection there.

So, we got an interesting comment and question from someone on Twitter from this article that you wrote, Matt, and I want to read this in full, because this is something. I mean, don't shoot the messenger here -- this is just the question that was posed from your article.

And it said, "I don't understand, is the stock market only for the select few? I see all these rich, mainly "white folks" singing the doom-and-gloom of "Robinhood investors." This is just entitlement talking, the market is big enough for all. Why is app investing being vilified? If the digital revolution is great for the new stay-at-home economy, why should digital investing be bad?"

And, Matt, I'm going to let you answer this, but I actually think he answered his own question in the way he worded this.

Frankel: Right. And it's not an uncommon thing for people to think. And to be fair, I mean, Mark Cuban is a rich, white guy, so. [laughs] But the point he makes is, he's using the words "trading" and "investing" interchangeably, which is, I think, what you're getting at. I have no problem with Robinhood investors. My brother uses Robinhood to invest in stocks and it's a great way for people who have, you know, not a ton of money, first of all, or not a ton of experience to invest in stocks. I mean, he was able to invest in Amazon for $20 ... and a share of Amazon is worth $2,500 or something. So, it's a great tool for investors. Investors are people who don't plan on selling their stocks for at least three to five years, is how we've generally defined it at The Fool.

So, trading is what Mark Cuban has a problem with. They're moving in and out of stock positions. I mean, I have a friend who does the Dave Portnoy-type stuff right now. He's been out of work, he has nothing else to do -- which is a lot of the reason people are so into this. You know, casinos are closed, there's no fantasy football to bet on or anything like that.

So, he has asked me, he said, what's a good stock to invest in? So I named a couple of my favorite companies. And he bought them, and then he called me a few days later, "Oh, they went up 20%, I sold them, what should I buy now?" And I said, "No, you're missing the point. I'm telling you to invest, buy these, use them to send your kids to college eventually, and you're moving in and out every day."

So, one group is fine, regardless of the platform. No one, especially on our end, nobody is vilifying Robinhood or app-based trading as an investment strategy, but as a day-trading strategy or moving in and out without really knowing what you're doing. If you're doing a form of gambling on there, that's what we're vilifying, that's what Mark Cuban and a lot of the billionaires you see talking on TV -- because he's not the only one, a lot of these billionaires are vilifying day trading because that's where people really get into trouble. Warren Buffett has spoken out against trading many times. It's just not a great strategy to make money long term, unless you're a highly trained professional working at Goldman Sachs or something.

Moser: Yeah. And I think that really is what I try to explain to people who ask me that question. Anybody can flip a coin and get it right, it's just a matter of, we're talking about sustainable, long-term success. And it's very difficult to day trade and to get it right, to be able to do that on a sustainable basis. And you know, that's just the way it is. I mean, the math is there, the examples are all there.

So, yeah, again, going back to Davey Day Trader Global. I think it's fun, I think it's funny, I see the entertainment value there. I like Dave Portnoy and Barstool. I mean, we just encourage folks out there to try to take this for what it is too, right? I think he knows he's being entertaining. You know, don't necessarily think that it's just that easy to go in there and start day trading and make a bunch of money, because clearly, clearly the deck is stacked against you.

Big difference between trading and investing, and I think that you did a good job of explaining that there, Matt.

Frankel: Okay, I'll share another little trade secret here. Most of the people you see pitching day-trading systems or selling day-trading books make more money from selling books and the systems than they do from day trading. That's just a little secret I want to share with everybody.

Moser: [laughs] Yep, that's a good point, that's a very good point. That's where the real money is at.

Well, let's take a look here at a question we got, an email from a listener, we'll get away from the trading versus investing discussion here and talk a little bit about something that is certainly right up your alley, Matt. And this is in regards to REITs -- real estate investment trusts. We've talked about those a lot recently. And we have an email from Rohit.

Rohit asks, "Hey, Fools, love the show, as always. Jason, you recently had Matt Frankel discussing real estate. Interested in your thoughts on exposure to REITs in a retirement account/403(b). Typical total market mutual funds seem to have 2% to 4% holdings exposed toward REITs, as far as I can tell. Is it worth having additional exposure?"

Matt, you're the REIT guy, what do you think?

Frankel: Well, so what he means by 2% to 4% exposure is that, let's say, you buy an S&P 500 index fund. There are REITs in the S&P 500; I know Simon Property Group, we mentioned, is one of them. You know, a lot of the larger REITs. American Tower, I'm not 100% sure it is in the S&P 500. So, you get some exposure. I don't know the exact percentage of the S&P 500 that's REITs, but 2% to 4% sounds reasonable. So, that's what he means by you're getting some exposure if you just buy normal index funds.

I'm the REIT guy, so maybe I'm a little biased here. Yes, it can help to get some other exposure, because real estate tends not to move with the overall stock market. It tends to go up over time. And if you look at long-term returns for REITs, they're right around 10% [annually], just like the stock market's long-term returns, but they tend to move differently in times of crisis. Obviously, this last crisis was real-estate specific, you know -- it affected businesses people have to go to, so REITs got really beaten down. But if you look at other crises throughout history, real estate tends to outperform the market when, you know, non-real estate specific problems happen. Even if you look during the 2008-2009 financial crisis, which was kind of caused by real estate, REITs outperformed the stock market. So [they are] a nice little way to vary your short-term returns without really affecting your long-term returns. It's one of the things I love about investing in real estate through REITs.

So, if your 401(k), 403(b), whatever your retirement plan is, offers a REIT index fund, it's more of a stock investment. So, don't think you're sacrificing growth to get it, which is a lot of people's, kind of, limiting factor. A lot of people think of it more like a fixed income [investment], because they pay such high dividends. So, it's part of your stock allocation, but it's a nice little, you know, diversifier away from just S&P 500 and small-cap funds and mid-cap funds and things like that. It's a way to diversify your stock holdings, and during crisis times it will help you, you know, sleep a little bit better, hopefully; not this particular one.

Moser: [laughs] Well, that's good feedback there. And, Rohit, I hope that was helpful, thanks for the question. And, Matt, let's go ahead and wrap this week up, let's talk about our ones to watch. What is the stock you're watching this coming week?

Frankel: I am watching one of my favorite REITs, speaking of REITs, it's called EPR Properties, ticker symbol is EPR. It's one that I've talked about a few times on the show. They are an experiential real estate company. So, they invest in things like movie theaters. Topgolf is one of their biggest tenants. They have water parks, ski resorts. I know, Vail Resorts, the ski company, is a big tenant of theirs.

So, obviously, experiential properties when no one is allowed to go out and have experiences like has been the case this year, has been a terrible business. But we're seeing things open up quickly. Their CEO just said in a recent presentation that Topgolf is actually getting a year-over-year rise in traffic as they reopen. I mean, obviously, not in the ones that are still closed, but in the ones that are open. And their results have been good. AMC recently announced the plans to open all of its movie theaters by the end of July, which is a lot earlier than people were expecting. And pretty much every government official, with maybe exception of the governor of New York, Cuomo, has come on and said, we're not going to shut things down again, even if there's a rise in cases, there are ways to deal with it without shutting it down. That's kind of a non-starter.

So, if you're of my opinion, that the risk that we actually get another wave of shutdowns is low, EPR Properties could be a good way to play the reopening.

Moser: Hmm, that's good. I like that, familiar with that. You and I have talked about that one before, I like that idea.

I'm going to take a look here more at Shift4 Payments, ticker is FOUR. And this is a recent IPO. As a matter of fact, I think the team on Friday, Dylan and Brian, may have covered it going through the S-1 there, if I'm not mistaken.

But Shift4 Payments, they develop and provide point-of-sale systems for businesses in the U.S. They're known for their Harbortouch POS system, big focus on retail and restaurants. And it seems to be something very similar to Square or even PayPal, since they made that iZettle acquisition. So, you know, I'm not really sure exactly what separates Shift4 from the others, but it's obviously a very big world, a big market, and a lot of markets out there to capture. So, you know, I'm going to be digging into Shift4 and see what they're made of this coming week.

But, Matt, I think that's going to do it for us this week. I do appreciate you jumping back on here with us and giving us the rundown on that article and talking to our listeners more about the troubles with day trading. Hopefully, you've talked some people off the ledge out there, and people would just think, "Hey, I'm going to stick with investing, no day trading for me."

Frankel: Well, next time I'll go to a place with better internet, but [laughs] it's always fun to join you guys.

Moser: Matt, you can only control so much, right? But that's going to do it for us this week, folks. Remember, you can always reach out to us on Twitter @MFIndustryFocus or you can drop us an email at [email protected].

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

Thanks, this week, to our guy Kyle Carruthers coming in there on, you know, helping Austin Morgan out there in a pinch, Kyle Carruthers putting the pieces together for us this week. Thanks, Kyle.

For Matt Frankel, I'm Jason Moser, thanks for listening and we'll see you next week.