Alexander E. Kearns committed suicide after running up massive losses in a Robinhood trading account. Kearns, 20, was a student at the University of Nebraska. He generated losses of over $730,000 before taking his own life.
This sad tragedy could have been avoided. The focus now should be on preventing similar tragedies from happening in the future.
It's easy to see why so many people are drawn to trading right now. Social distancing has kept people at home and online. The stock market's amazing run over the past three months has generated tremendous interest.
As a result, thousands of new traders have suddenly jumped into the market. Many of them have little to no experience. They're falling into the same traps that challenge all new traders.
How can new traders avoid these traps?
- Don't Gamble. Traders shouldn't gamble, and gamblers shouldn't trade. If you're not sure whether you're trading or gambling, you're gambling.
- Learn How To Lose. Every trader has wins and losses. Good trading can be described as the art of losing well. Successful traders know how to contain their losses.
- Study. Stop asking other traders which stock you should buy, and start asking them which books you should read. There's a ton of good information out there.
We don't know exactly what happened in Kearns' trading account, due to confidentiality issues. We do know that Kearns was buying and selling options, and using relatively sophisticated strategies.
This would require the broker to approve the trader for margin trading. According to Kearns' suicide note, he never intended to use leverage, and thought his losses would be limited to the amount he placed in his account.
The exact details of Kearns' situation aren't yet available. There's some debate as to whether there was a glitch in Robinhood's system. It's possible that Kearns didn't lose as much as his account indicated.
One thing we do know is that options traders are required by law to fill out paperwork that indicates a high degree of market knowledge and sophistication. It's not clear how a 20-year old college student with no income could have qualified as such an investor.
There will be investigations. Procedures will be changed. Blame will be assigned. And all of this will happen too late to save Alex Kearns.