Gambling by another name

Day trading: Regulators say frenetic investing is the way to lose rather than make a fortune.

August 12, 1999

DAY TRADING can be harmful to your financial health. That's the verdict of the North American Securities Administrators Association, which just completed a seven-month study of day-trading accounts.

The state securities regulators want tighter restrictions on day trading companies, particularly on advertising and marketing that emphasizes quick riches. That's a fine idea.

The NASAA study comes on the heels of Atlanta day trader Mark O. Barton's deadly shooting spree, which left 13 dead. Police believe large day-trading losses may have contributed to Barton's rampage.

It's ridiculous to assume every day trader is one tough loss away from murder, but it's also nonsensical to allow this risky -- even reckless -- investment practice to continue unfettered.

Day trading is the antithesis of smart investing. At a minimum, it runs counter to the well-known and successful investment practices of such gurus as Peter Lynch and Warren Buffett. They recommend investing in companies whose earnings will grow year after year and holding their stock for a long time -- 5, 10, even 20 years.

Day traders play for small stakes in any given investment, hoping to accumulate profits from many transactions. Their game is to ride hot stocks up, with little regard to long-range prospects. A long-term investment lasts about an hour.

Some 70 percent of the day traders lose money, according to the NASAA study. Only half of the remaining 30 percent actually turn a profit.

Defenders of day trading say it is speculation. But speculation assumes that investors have some knowledge of the companies they are purchasing.

Most day traders know little. So they're really just gamblers.

You wouldn't let a casino operator misrepresent the chances of hitting a slot machine jackpot. Day-trading firms should be held to the same standards: They ought to disclose that the deck is stacked against people who quit good jobs to become day traders. The proposed NASAA standards would force them to do that.

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