I trust the adage’s accuracy. Few of us will be robbed at gun point. Many of us, a record many these days, reach for yield. We reach like outstretched, airborne acrobats in full splay grasping for the swinging trapeze. Who can blame us? We live in a dystopian world of central-bank conjured financial repression, evinced by trillions of dollars of government debt bearing negative interest rates, which are an affront to natural law.
But yield reaching is no monopolist in separating investors from their money. I assert that it’s not even the top paulperizer. More money has been lost in a competing activity: the pursuit of quick riches.
The Powerball Lottery jackpot approaches $500 million several times during a year. The revenue and earnings of the Las Vegas and Macau casinos creep higher annually, as do the height and the girth of the casino themselves. (I suspect that sooner than later a Louvre-sized casino will emerge from the Las Vegas desert.) Cable-television shows mint money featuring blundering treasure hunters and gold miners.
Humans are ingrained with a desire to grab-and-go as much as possible, as quickly as possible, with the least amount of effort extended as possible. The goal, in most cases, is to retire and luxuriate in a bespoke Cockaigne where one can shrivel the brain and marshmallow the body at one’s leisure.
Dave Portnoy, founder of the pop-culture website Barstool Sports, is the exemplar du jour of the latest fad to get rich now. Portnoy proves the sage observation in Ecclesiastes that has held for time immemorial: There is nothing new under the sun, for Portnoy has only rehashed and repurposed a popular 1990s quick-rich fad: day trading.
Yesterday, Portnoy was a snarky culture commentator. Today, he is a day-trading proselytizer. His personal testimonials are as brash as they are crude. Cicero he ain't. "All I do is make money. This game is f**king easy," Portnoy asserts. "Literally the easiest game I've ever played. All I do is print money."
Portnoy continues in the same blustering vain when he asserts in a Tweet that “I’m sure Warren Buffett is a great guy, but when it comes to stocks he’s washed up. I’m the captain now.” (Why is Portnoy assure of Buffett' great-guy status? I doubt he has met Buffett.)
Whether Portnoy believes his bluster is irrelevant. He captured his 15 minutes. Of course, Portnoy has been favored with a gale-force tailwind: convenient trading apps, commission-free stock trading, a lack of gambling outlets, and boredom have combined to resurrect the formerly discredited activity.
Portnoy has gathered a sycophantic, if not gullible, flock in a short time. Most will get fleeced. We have a precedent.
Research tells us that only a third of U.S. day traders between 1992 and 2006 reported a semblance of a profit after costs. Other research shows that the average individual investor under performs a market index by 1.5% per year. The more you try, the more you lose. Active traders under perform by 6.5% per year.
Pursuing the quick buck in the financial markets cannot only be hazardous to your wealth, it can be catastrophic to your health. A 20-year-old Nebraska college student, Alexander Kearns, reportedly committed suicide after viewing his Robinhood app only to be stunned into a despair-inducing reality with a $700,000 negative balance. Kearns had been trading frequently, and trading frequently with margin debt.
Yes, it's true: a select few will win at grabbing quick riches, but most winners will eventually lose. Windfalls are frustratingly fleeting.
Two economists and a statistician showed in a 2001 paper that people rev up their spending after receiving an unexpected windfall. The paper's authors studied the habits of lottery winners approximately 10 years after the windfall. They found the winners saved only 16 cents of every dollar won.
Other research shows that younger people (in their 20s, 30s, and 40s) bestowed a large inheritance quickly lost half the money through spending or poor investments.
The human desire to get rich as quickly as possible with as little effort as possible is as difficult to eradicate from the psyche as cancer is from the body. Experience offers no protection.
Investment newsletters and stock-trading systems proliferate precisely because they appeal to the need to accumulate immediate wealth sans tiring effort. Many investors and traders are repeat customers. They cycle through numerous newsletters and trading schemes in search of El Dorado.
Ground-floor investing in the hot market is a recurring Siren song: Crypto currencies, cannabis, 5G technology, space travel. The germinating market will burst forth and spread like chickweed. The market will soon generate annual revenue measured in the trillions.
Now, imagine if you own the stock of a company that captures a slice of this trillion-dollar market in the early stage?
You have no need to imagine. Many newsletters copywriters do the imagining for you. That first mover whose shares trade at $0.25 today could be the $2,500-per-share Amazon of tomorrow. Never mind that for every Amazon that dominates it market, the spent husks of hundreds of Webvans litter it.
Let's keep moving. Many investor prefer a more energetic approach. Plenty of trading systems await. Portnoy's is one; he keeps company with others.
One intrepid trader claims his system enabled him to generate a 47,233% return over the past eight years on starting capital of $15,000. He claims to have made $9,100 a day trading stocks and options in 2019. He claims total earnings of $7,132,785 trading stocks and options. Curious? Your curiosity can be satiated for $1,499 a year, the cost of the proprietary trading system.
If the proprietary trading system works today, it's less likely to work tomorrow.The more people use a trading system, the less effective the system becomes. Call it the investing world’s corollary to the second-law of thermodynamics. Now, for the obvious question: If the trading system is so remunerative for our intrepid trader, why is he willing to sell his secrets when selling them diminishes their efficacy?
Get-rich-quick investors are always eager to learn a secret. The prospect of exploiting a "secret" pricks the get-rich-quick nerve. Secret “loopholes” abound. The government “owes” you some such amount of money. Your "$20,349 government “check” awaits, but you must act now to learn the secret loophole to collect your check.
The secret investing “loophole” nearly always resides in the tax code. The loophole enables a real estate investment trust (REIT) or master-limited partnership (MLP) to pay high-yield dividends and distributions. The loophole is that REITs and MLPs are required to pay most of their earnings to investors to avoid paying federal income taxes. It's really neither a secret, nor a loophole. It's an obscure fact, simply a provision in the tax code.
Now for the “loophole” in the copy writing: The next "government check" is the next dividend or distribution payment. You'll collect that $20,349 check only with a $1 million investment.
Free lunches haven ever existed anywhere under the sun or elsewhere. Enduring wealth is predicated on self-control, patience, low-time preference, discipline, habit, and intelligence. Effort is involved vetting investments and constructing and monitoring an enduring portfolio.
Time is an essential ingredient. It enables compounding, which creates the wealth. The process is slow, decades long, and akin to watching your face wrinkle, but then terminal velocity sets in, and the wealth begins to compound near a geometric rate.
Warren Buffett's massive wealth materialized later than sooner. Yes, he was wealthy for most of his life, but billionaire status did not occur until his mid-50s. Buffett would buy-and-hold, and then he would buy-and-hold some more.
Then it was off to the races.
With one exception – death – no lasting change is sudden. Wealth that arrives in one minute is sure to flee the next. Accumulating wealth is a grind that occurs only when the foundation supporting the process is solid and durable. The foundation requires time to construct, through learning, experience, and action. Rebuilding is frequently required in the early years.
Ditch the desire for sudden riches, if only to preserve your sanity. Fixating on immediate wealth plays havoc with the emotions. If you get lucky once, you'll think you'll lucky again and you won't. The casinos in Las Vegas and Macau offer immediate proof.
And if you attempt to expedite wealth accumulation with leverage, God help you. The borrowed money only amplifies the emotional swings and the magnitude of the damage infliction by poor decisions (which are sure to increase in number). Our our unfortunate Nebraska trader tragically proves this point.