🔒 WORLDVIEW: A young day trader’s suicide & the perils of investing

In mid-June, a 20-year-old American student took his own life. Such tragedies are, sadly, not uncommon. But what makes the story of Alex Kearns important is that his suicide was apparently the direct result of his day trading activities.

According to reports, Kearns, who was stuck at his parents’ home after his university closed due to coronavirus, was an active trader on the online brokerage platform Robinhood. In mid-June, Kearns opened his account and saw a negative cash balance of almost $750,000. Shocked and horrified by the apparent staggering loss, he killed himself. His suicide note indicated that he didn’t understand how he had lost so much when he had – he believed – avoided trading on margin.

It turns out that, according to Robinhood, Kearns was wrong – the negative balance actually reflected only one leg of an options trade he had made. His true cash position was a positive balance in the region of $16,000. Nevertheless, the shock of his perceived loss apparently drove him to an act of ultimate desperation.

Obviously, any suicide is the result of a complex set of circumstances. But dramatic financial losses are a key factor in many suicide deaths around the world. And the tragedy of Alex Kearns underscores a disturbing trend – a rapid growth in day trading by young, sometimes ill-informed people who do not fully understand what they’re doing.

First, to be clear, the fact that more people have access to affordable investment technology is generally a very positive thing. There are many products out there that offer access to cheap index funds and ETFs, for example, allowing investors to build good passive portfolios with minimal cost and fuss.

However, the rapid growth of day trading platforms is less positive. There is a growing number of platforms out there that offer people quick and easy access to highly risky, leveraged day trading strategies. Targeting young people, these platforms use so-called gamifying functions like badges, leaderboards, and onscreen “rewards” like a spray of confetti after each trade to make trading feel like a video game – something fun and familiar. But easy access to margin and high-risk, complex options trading is a dangerous game.

Again, to be clear, options and margin trading are not inherently problematic. They are, in fact, an important part of the broader financial market ecology and play a role in maintaining market efficiency.

But there’s something frightening about allowing uninformed amateurs to play with these tools – like watching children juggling sticks of live dynamite. There’s no doubt that it is exciting, but it is far from safe.

Within my own family, I have seen some of the dangers of this type of financial market democratisation. One close relative burned his fingers trading oil futures, and another ended up losing a bundle on contracts for difference (CFDs). Happily, the losses in both cases weren’t totally devastating, but the risks of trading in very complex, fast-moving, professional markets is high. App-powered day traders are in the race against professionals backed by unthinkable amounts of computing power. While there are inspiring stories out there of day traders who are crushing it, such tales almost invariable end in woe (search around on the internet and try to find a day trader who outperforms the pros for more than, say, a year – I bet you can’t).

In a lot of ways, the day trading frenzy is reminiscent of the conspiracy theories and fake information that abound on the internet. Every day I get emails from community members telling me that I am ill-informed about issues like climate change or coronavirus that cite online sources that are very clearly nonsense. A few seconds of research could debunk the vast majority of the nonsense out there about sinister conspiracies and scientific cover-ups, but people continue to wallow in the rubbish, convinced that they alone have uncovered the “true” secrets of the universe.

Similarly, you can find a thousand day-trader Reddits filled with confident folks who believe that they have cracked the code of the markets, a goal that has eluded all the biggest financial organisations in the world despite their resources and expertise. Authoritative posts from people with names like “millionaireby25$$$” explain how the professionals have never grasped the simple secret of, say, energy stock prices but by following a simple formula untold riches await.

We all want to believe that we are special, different, uniquely able to see the world as it really is. But we aren’t. In reality, at least half of us are below average, and only a handful of people are truly exceptional. Trading is risky, especially trading complex instruments and especially leveraged trading. Please tread carefully.

 * Interested in day trading? Answering your burning money questions at this week’s BizNews Finance Friday webinar (3 July, at noon) are: personal finance book author and investment company entrepreneur Magnus Heystek, of Brenthurst Wealth Management, and Fred Razak, a global trader at CMTrading. Sign up here: https://attendee.gotowebinar.com/register/4798730946457764880

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