Should I Try to Day Trade? | Erik Averill, Brandon Averill | AWM Insights #15

 
 
 

Episode Notes

The market has continued to bring surprises. In the last couple months we've seen one of the quickest recessions to one of the quickest recoveries then suddenly last week we saw a -6% down day in the market. 

In tandem with this market volatility, we've also seen many big name companies declare bankruptcy followed by their stock prices skyrocketing. In their wake have been more voices who have adopted a day trading approach claiming now is the time to buy these companies pretty much across the board.

This can cause us as investors to question what is going on in the short term, and ask if we should lean into this day trading approach. However, we also know that the disciplined approach is going to continue to be to cut out the noise, control what we can control, and stick to the plan for the long term.

This week, Brandon & Erik discuss these news items and address the following questions and topics: 

  • Is now the time to buy a specific company's stock that I've heard about in the news?

  • How concerned should I be about short-term market fluctuations?

  • Is there ever a time to consider more of a day trader approach?

  • If I have a pool of money that I'm okay to take more risk with, what are some of my options to consider?

  • What options are available besides stock picking on public markets?

  • What do you guys see is the best approach for long-term wealth creation and success?

+ Read the Transcript

Erik Averill (00:00):
Hey everyone. Welcome back to another episode of AWM insights. I'm your host, Eric Averill, and joined by my cohost Brandon Averill, Brandon, welcome back to the podcast.

Erik Averill (00:00):
Hey everyone. Welcome back to another episode of AWM Insights. I'm your host, Erik Averill and joined by my cohost Brandon Averill. Brandon, welcome back to the podcast.

Brandon Averill (00:10):
Thanks. Excited to be here.

Erik Averill (00:11):
So the markets continue to not disappoint in bringing some great surprises, right? We've seen one of the quickest recessions to one of the quickest recoveries. And then all of a sudden last week we get a negative 6% down day in the market. And for a lot of longterm investors, it leaves us scratching our heads of what's necessarily going on in the short term, but we know staying disciplined, staying longterm, it's the right thing to do. But on the flip side, we also hear now about all of these day traders of people trying to take advantage of these individual equities. And we've seen some crazy things. Companies like Hertz, JCPenney, Pier 1, Chesapeake Energy and GNC have all filed for bankruptcy but then their stock prices is going left and right. And you have people trying to profit off of them. What advice do you have for our audiences? Is they start to maybe ask the question. Should I be trying to day trade?

Brandon Averill (01:11):
Yeah, so it's a funny question. I mean, we're getting it a lot and I think a lot of it comes from the volatility. I mean, we're pretty close here to becoming one of the most volatile markets on record. So it's certainly been a crazy year. We've had three of the worst 25 loss days this year in history, or at least going back to 1928 and we've had two of the largest gain days going back to 1928. So, when we see prices move around this much, I think it's only natural for people to feel like, "Hey, I can get in on this game." There's something that, I think we all have observed is that lottery effect, there's no way that this stock can go any lower. We saw that with the airlines early on, the cruise ships. And now we're seeing it with companies like you mentioned that are going bankrupt, such as Hertz. I mean, we're seeing, Hertz has filed for chapter 11, bankruptcy and now is issuing new shares because of investor demand. I mean, it just doesn't make a whole lot of sense

Erik Averill (02:16):
To interrupt you just to stay on Hertz. I think it'd be helpful for our audience to hear what this experience has been like. And what is tempting about it is, so you had Hertz at one point, the high of the stock was over a hundred dollars per share where it drops down to 55 cents per share but then the volatility. So you have one day it's down 25%, it's down 24%, then it turns around and it's up 115%, up 71%, up 84%. And so there's this emotion as an investor or I should say a trader seeing like, "Well, 55 cents, that has to be too low. It has to go up." And then there's almost this confirmation bias of, "Wow, I am really smart because I participated on a day where it was up 115%." What would you say is wrong with that mentality or dangerous about that type of thinking?

Brandon Averill (03:10):
Yeah, I wouldn't say it's wrong, it's just natural, that's how our brains are wired. Our brains are wired... It's like the gambler kind of situation, right. We go into a casino and we hear the bells and the whistles, all those noises that are going on in the casino are there to kind of stimulate us to go for the big win. And the stock market doesn't do any different. So I wouldn't say it's wrong. I think the big distinction, like you said, is figuring out who you are, are you a trader? And we could get into how difficult obviously that is, or are you a longterm investor and being a longterm investor, that's where you really need to focus on eliminating that noise. I mean, price changes in the short term are kind of that dopamine hit right for the trader. They can try to act upon it, et cetera. But for the longterm investor it's just noise.

Brandon Averill (04:05):
And we're seeing all kinds of media personalities right now, out there. Dave Portnoy's is on the air, trading stocks this way and that way. And it's really funny. I mean, I've had so many conversations with people on this and I don't think they realize yet that it's just a shtick for him. It's just for entertainment, he's not taking this seriously. He's the one in on the joke. And so many people just get bought into the media and thinking, "Hey, I can make a quick buck." And I think when everybody steps back, I don't think there's anybody that if they take a step back and think rationally thinks, "Yes, there's a quick buck." We all know there, aren't quick bucks out there. So it's about building wealth over the longterm. And so I think that's where, it's not wrong that you're thinking that way, it's just that you need to take a step back and figure out who you really are in this investing game.

Erik Averill (04:57):
What also comes to mind when you think, when you're explaining it's very similar to gambling or to Vegas. What we always say right, is you only take the amount of money that you're willing to part with a hundred percent, because you actually know it's far more entertainment and the odds are always in the favor of the house. So sure you can sit down at a blackjack table or roll the dice. And all of a sudden you have this experience where you have this big win, but the rules of the game and the probability always, always tends to be in the favor of the house.

Erik Averill (05:32):
And so going back to understanding who you are as an investor is so important because it's interesting, we have conversations with certain people who we know very, very well, who are very risk adverse and do not like the comfort of, or the uncertainty of the volatility of the public stock market. Yet they're the same people asking, "Hey, should I go in and buy Hertz?" And it's really returning to, what's important to you and what's your plan and what is your risk appetite and the money that you are risking in this investment, is this money that you would be okay with losing in the same entertainment space. And so I think it just always returns back to having a plan, staying focused, staying diligent.

Erik Averill (06:18):
Brandon, can you talk a little bit about, if you are going to make a concentrated bet, is this where you should make it though, if you are saying, "You know what, I understand that there is high risk and high uncertainty, but I see it as an opportunity. I have this pool of money that I am willing to be very risky with." Is this the best place to go and get return in these individual stocks that have been beaten up or these companies that have filed bankruptcy?

Brandon Averill (06:45):
It's a good question Erik and we've hit on it before. And I think our resounding answer is no. Information in the short term is going to be all over the place. Information in the public markets is efficient, even in the short term, when you see prices bouncing all over like this that are generally caused by emotion. I think you'd be hard pressed to find anybody that really honestly could say that they have a differentiator here or that they know something that somebody else doesn't. When I press some of our clients on that, they can't explain why they know Hertz is going to go up from here, but they just know. And I think that's a dangerous place to be.

Brandon Averill (07:25):
On the flip side, we've talked about, there are areas where information is inefficient, right? You can have an information advantage and that's turning back to the private markets. I'd much rather be looking at the risk reward set up of a startup company that's curated by some of the best venture capitalists in the world versus my guess on what Hertz or American Airlines is going to do. That second part is a guess, the first part is you have some very knowledgeable people that have lived through multiple market cycles in the private markets and that have had a lot of success investing in those startup companies. So for me, if I'm going to put my dollar down where I think I can achieve out-sized returns, then I'm going to turn to the private markets. That's just where I believe you're going to have a much, much better outcome. And so I think that would be my answer.

Erik Averill (08:20):
That's very helpful. And for the audience, really our goal here on the podcast is to help provide that unbiased information, to make sure that you have the best chance at winning the money game when it comes to how you define it. And so hopefully what you don't take away from this is us saying, "Oh, this is dumb and nobody should do it." It's more necessarily, "Does it fit into your investment plan? Do you have an understanding of how much money you're willing to use as entertainment and gambling versus what are the... What's the true sound investment plan that you have laid there so that you can accomplish whatever's important to you. Whether that's retiring, whether it's funding your kids education as this really comes back to having a plan, having a purpose and making sure that you're capturing the returns that you deserve for the risk that you're willing to take."

Erik Averill (09:11):
And so we appreciate you guys' attention. We look forward to joining with you guys next week and until then, stay humble, stay hungry, and always be a pro.

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