Return of the Day Trader

A few weeks ago, I felt a neurological twitch, a tingling in the right index finger. At my age, you don’t take tingling fingers lightly, especially if your courage in the face of terminal collapse is closer to Woody Allen’s than Socrates’. Not only that, a breadwinner can’t be too careful. There are those who depend on me: beloved wife, kids at fancy college with nosebleed tuition bills, 12-year-old dog with cysts (vet says they’re benign but you never know). So I try—I really do try—to be financially responsible, invest conservatively, minimize risk at the expense of reward. Typically I cling to the safety of T-bills, leaving only a small portion of our diminished nest egg exposed to the ravages of the market.

When Phase Two landed with a thud, I swore—great gobs of us swore—never to day trade again. Fool me once, shame on Henry Blodget. Fool me twice, shame on me.

But the second I felt the tingle, I threw caution to the wind. A midlife swipe at adventure? Maybe—but certainly further proof that we are, as behavioral economists tell us, irrationally optimistic and brimming over with hubris when it comes to making financial moves. Whatever it was, and with my right index digit still on vibrate, I logged onto an online brokerage and, for the first time in years, placed what was (for me) a reasonably heavy bet. Six hours later, fickle finger still pulsing, I dumped the investment. Just like that, my dependent brood—wife, kids, be-cysted dog—was $1,700 more secure than when everyone crept out of bed that cold morning.

I was back in the saddle (an Aeron chair, actually). I’m day trading again. And I’m hardly the only one. Over the past couple of months, the good-old, frenzied in-and-out trading game is back, juiced by a surprising increase in the opening of new personal trading accounts.

Buy and hold? Look where it got us.

Hey, it’s time to take the bear by the horns.

To stop frothing and back up:

Once upon a time, I day traded with controlled aggressiveness, but I was never so feckless as to quit my job and hunker down in the basement surrounded by monitors continuously refreshed with real-time quotes. Moreover, I harbored an instinctive distrust of Jim Cramer before it was fashionable. But like millions of others, I went through phases when I was cocksure I could outsmart the market.

Phase One was the early 1980s, pre-Internet but post the emergence of discount brokers. Overnight, trading costs had become beside the point—mere pennies per transaction compared to the sobering 1 percent commission (a hundred bucks on a $10,000 trade!) you had to fork over to a smooth-talking, order-taking broker at Merrill Lynch, someone who knew as much about picking winners as the rest of us did—which is to say, virtually zero. Phase One was a blast while it lasted. My pals and I—writers, editors, creative types with a lifelong disdain for Wharton School types—met daily for lunch at a Greek coffee shop. There, we exchanged stock tips with our mouths full of tuna fish, then raced back to the office to phone in our bets. What did we bet on? What didn’t we bet on? Shooting stars called NBI, a pioneer in word processing, or AOL, a sure thing as there never was. Each night when we left our offices, we made sure to pick up—I’m dating myself here—the late edition of the New York Post, which carried the day’s closing prices. More than once I was nearly dented by a taxi as I crossed against the light on lower Park Avenue, my nose buried in the stock tables, calculating the day’s winning receipts.

Phase One came to a crushing close, of course, and those of us who lived through it will never forget the induced nausea that hit on October 19, 1987: Black Monday, when the market dropped 508 points (22.6 percent, but who’s counting?) Wise heads told everyone not to panic. And me, I didn’t panic—for three whole days. Then I panicked. Threw my entire day-trading portfolio overboard. So did all the other hot shots at the lunch table. After that, with tails between our legs, we still went to the Greek coffee shop and shot the breeze, but the only trades we talked about now, and for nearly a full decade that followed, were pending Rotisserie League moves.

Eventually, of course, we snapped back. And so did millions of other individual investors whose self-delusions turned out to be dormant, not dead. Enter Phase Two, the dot-com boom. Faster than you could say Toby Lenk we were at it again, index fingers on fire. By now we all had computers and personal accounts at online discount trading houses—upstart operations such as Trade*Plus and AmeriTrade, which the big boys soon followed into the fray: Schwab, Fidelity, Merrill Lynch, which, though initially dismissive of technology, plunged feet first into the frenzy of electronic trading. Phase Two was also a blast. Now we could day (and night) trade without so much as talking to another human being—not even a phone call. We formed geeky investment clubs. We bought Barron’s on Saturday mornings. In Phase Two, even a chimp could make dough by throwing darts at companies such as WorldCom, JDS Uniphase, VA Linux, and eToys. Are we rich yet?

When Phase Two landed with a thud, I swore—great gobs of us swore—never to day trade again. Fool me once, shame on Henry Blodget. Fool me twice, shame on me. But that was then, this is now, and now, as hyperventilating talking heads opine on CNBC, now is just possibly a once in a lifetime investment opportunity. Indeed, to the naked eye, stocks are stunningly cheap—Wall Street blue chips selling at Wal-Mart prices. And not fly-by-night issues either, but stalwarts such as G.E., Citi, Google. Even Buffett’s Berkshire Hathaway—which sold at $150,000 a share just a few years back—is in the tank. Today a share goes for a mere $90,000 or so. Less than an Audi R8!

No wonder my finger started to twitch a few weeks ago. I know, we all should know by now, that by trading now we might be walking into yet another trap, a phase that begins with self-delusion and hubris and ends with heartbreak and destitution. Besides, retirement is around the corner, and it’ll cost us, so we better be extra careful. To ignore lessons of our ignominious personal financial history is to be doomed to repeat them. We should know by now that stock picking’s a sucker’s game. The wise investor, we’re told time and again, stashes his dough in plain-vanilla mutual funds, properly diversified. Or so-called target-date funds with sensible ratios of stocks to bonds. If actively invest you must, then actively invest yourself in spiritual fulfillment, not blow your wad at the casino.

Except, you see, this time might well be different. This time I’m day trading with a system, and so far it’s been flawless. The system was delivered to me one morning in the pages of the Wall Street Journal. The writer described how he’d made something like 35 percent on a single investment in a single day. Not by flipping this or that stock—phooey on that—but flipping ETFs, exchange traded funds, assets that trade like stocks but are baskets of stocks that come in a wide variety of flavors. There are ETFs that mirror the stock market as a whole; or a particular index within the larger market; or foreign stock market; or particular commodities; or select market sectors such as health care, solar energy, aerospace, etc.

In the case of the finger-tingling Journal piece, the ETF in question was ProShares Ultra Financials (UYG), which is designed to deliver (should it deliver anything but heartache) super-charged results based on the performance of the U.S. financial sector: banks, financial-services firms, insurance companies, real-estate investment trusts. In other words, the most toxic basket of companies imaginable, so noxious that on the morning the Journal piece appeared, UYG was essentially a penny stock, selling at a buck and change. Even a dart-throwing chimp would have the brains to ask, “What’s the worst that can happen here?” Sure, UYG could test the lowest of limits—meaning, it could plausibly trade at 0—but more likely, it will swing up and down violently, depending on day-to-day headlines in Washington, making the investment, in effect, a popularity-contest play. When Geithner and Bernanke have a good day, I’ll have a good day. When G. and B. step on their own dicks, I’ll step on my own dick. In other words, here’s an investment dynamic I can truly understand.

Now, to buy and hold UYG is not a system. The system, which can be explained in a mere 12 words, I discovered in a post buried in the readers’ forum that accompanied the Journal piece: UYG goes down 10 percent—buy. UYG goes up 10 percent—sell. Given how volatile things are at the moment, I don’t have to tell you that UYG bounces around day-to-day like crazy, which means my finger is on auto-twitch these days. Repeated buys and sells—I’ve executed four now—have netted me a low four-figure gain on each occasion. Small potatoes maybe, but as that gifted stock-picker Saul Bellow once said, “It all adds up.” At this rate of in-and-out trading, I’ll likely never pocket enough UYG crumbs to pay my kids’ tuition bills, but with any luck enough I might be able to cover the vet’s surgical bill, should it come to that, God forbid.

In any case, I know what you’re thinking: Should you take this simple, 12-word system and run with it? That’s your call, obviously. Just keep in mind the usual disclaimer: past performance is no guarantee of future results—except in the case of my own long, tortured life and times as a day trader, when past performance all but guarantees that future results won’t be very pretty.

Lee Eisenberg, who wrote the bestselling The Number: A Completely Different Way to Think About the Rest of Your Life, is the author of a new book about consumer behavior to be published this fall: Shoptimism: A Journey Through the Brave Heart and Restless Mind of the American Consumer. He is blogging on the subject at ShoptimismBook.com.