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Many of their customers lost money as they tried to trade for themselves. Then, the worst possible thing happened: a bull market emerged, driven by irrational exuberance! Traders thought all you had to do was buy some stock and hold on. It was so easy. It was so profitable. It was so much fun. There was even talk that it would never end. |
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Why do we say that this was the worst thing that could happen? Because it did end in March and April of 2000. When it did, lots of money was lost in a big hurry. Shellshocked, dazed, and confused were the emotions of the day. Guts were wrenching as naïve traders quickly learned about margin calls when they were forced to sell heavily-leveraged positions. |
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The run-up in stock prices, particularly in the technology sector, had masked a serious weakness in the entire premise of self-directed, online trading. That weakness was that most people didn't really know how to trade. |
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In an unscientific survey taken in April 2000, we concluded that well under 10 percent of those with online trading accounts had actually ever executed a short sale. Let's be blunt: if you don't understand, and are not comfortable with, playing the shorts, you simply don't understand the markets well enough to call yourself a trader . . . or to put your money at risk. |
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Consider the implications. If all of these online traders really don't know how to trade, and if it was just the bull market that was carrying them along, what is going to happen to this entire industry in an extended bear market? |
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How many of you are old enough to remember when absolutely everyone had to be in an oil drilling partnership? Or, when everyone had to invest in an apartment limited partnership? When the music stopped, and the profits weren't there, the firms that specialized in these financial products just dried up and blew away, taking their clients with them. |
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Is that what's going to happen to the online trading industry? Is this just one more passing fad, a brief blip on the financial radar screen that fades to nothing? We think not, because of the success of one particular group of traders. |
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While most people with online accounts do not know yet how to trade, there is one group that is different. This group has been determined not only to make money in the markets, but to understand how they were making it. They have learned how to make money in both a rising and a falling market. They have learned how to read charts, interpret market maker moves, and use key indexes to anticipate price move- |
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