Four Tips for Survival

A note from fellow contributor Tim Melvin caught my attention Thursday. He pointed out that discount brokerages reported a surge in new accounts in October, as well as a notable spike in trading activity. I was skeptical at first, but it appears this is right on target, pointing to greater trading frequency by small retail players.

This is absolutely nuts, because October triggered the highest-risk market conditions we've seen in several decades. To me, these numbers expose a disturbing trend that doesn't bode well for this class of investors. Simply stated, many of the little guys who lost their shirts in the market crash are now trying to trade their way out of the big black hole.

Add in the unhealthy element of seduction that comes from watching 400-, 500- and even 700-point swings in the Dow Industrials. This is the type of phenomenon that puts dollar signs into the starry eyes of underskilled folks who have no clue about the significant danger in trading through historic volatility.

The consequences of this activity for the public investor are frightening. Consider the extensive damage already done to their long- and short-term accounts during the financial crisis. Rather than raising cash and waiting for a better stock market, they're risking speculative capital and core wealth trying to game an environment that's essentially ungameable.