Speculating During the Pandemic

May 28, 2020

At a time when casinos around the country are temporarily closed due to COVID-19, Americans have found a new avenue for wagering: short-term trading in the stock market. In addition to stay at home orders, there have also been technological improvements that enable anytime access to trading platforms, as well as a meaningful reduction in trading commissions at many online brokers (often as low as zero). This combination has created a perfect storm for increased trading volumes. Just consider these recent data points:

  • March included 27 of the 30 highest volume days in Schwab’s history.
  • E*Trade and TD Ameritrade both reported trade volumes more than quadrupled in April compared to the year ago period.
  • Robinhood, a mobile trading app that targets millennial investors, saw three million new accounts in the first quarter.

Trading activity has been supported by outsized volatility. Since the beginning of February, the S&P 500 has had 34 sessions where the market ended 2% higher or lower from the previous day’s close. For perspective, in the five years prior to February 2020, there were only 31 sessions with moves that were 2% higher or lower from the previous day’s close. This volatility helped attract retail trading activity that is reminiscent of the dot-com eraAnd as the market rallied off the March lows, many of these new market participants likely profited. The problem is that this short-term success may not be easy to replicate. As is often the case when something appears to be working, transitioning away from short-term trading to a more thoughtful approach (long-term investing) is an unlikely next step for many of these individuals, at least until success fades. Alas, consistently making money by quickly trading in and out of securities is very difficult.


And while there’s nothing immoral or illegal about speculation, it is worth noting that it can be harmful to your financial health. Professors Brad Barber of UC Davis and Terrance Odean of UC Berkeley sampled 66,000 portfolios from a large discount broker and found that that the 20% of households who traded most often lagged the market index returns by 5.5% annually1. Their conclusion was simple: short-term trading is hazardous to your wealth.  For this reason, we caution against comingling investment funds with capital that is being used for speculation (short-term trading).

At The Fiduciary Group, our focus continues to be on owning high-quality businesses for the long-term. We are investors, not traders. During times of heightened uncertainty and outsized volatility, our decision to patiently maintain our ownership interest in certain businesses could be seen as indistinguishable from inaction. While that may appear to be the case at the surface level, the reality is that much is being done within the companies that we own. Said differently, we trust the management teams we’ve partnered with to assess the impact of the pandemic on their business, adapt to a new macroeconomic reality, and make changes to position their businesses to survive and thrive throughout this crisis and beyond.

We expect that the decisions being made within many of the companies we own will ultimately result in a stronger relative competitive position. We also expect these companies to continue to generate significant profits, return capital to shareholders, and reinvest in their businesses for future growth. We plan to own most of these companies for years, and continue to believe that patience is critical in the pursuit of long-term returns.

The stock market has proven to be a powerful way to compound long-term wealth. And, in the short run, many new market participants have likely done well in the run-up over the past two months. But as experienced investors know (or have previously learned the hard way), that unabated short-term success is unlikely to be sustained. Trading can be fun and exciting — but as economist Paul Samuelson famously quipped, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

As always, please contact us if you have any questions or concerns.

1 Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: https://ssrn.com/abstract=219228 or http://dx.doi.org/10.2139/ssrn.219228