last week, I was struck by a question that one student asked me. I had been going on and on about how people had started to lose money on these new stocks, especially the recent
IPOs that are off lockup. (It helped that the teacher of the class, Steve Galbraith, has research that shows the average stock in this position was down 25% during a period where the
The student wanted to know why, given that people were losing money, they didn't just stop doing what they were doing. I thought for a second that, sure, because we are supposed to be rational individuals, we should stop doing something that makes us no money. But then again, how do you explain the jam-packed casinos of New Jersey, Las Vegas and Foxwoods? We know statistically that the vast majority of people who go to the casino -- or to the track, for that matter -- lose money. But the fact that
do win, seemingly regardless of any demonstrated skill, allows for the continued popularity of these gambling institutions.
We seem to be in the same place now with the heavy trading I am seeing online. Some people are definitely winning or no one would give it a try. But the idea that people will stop online trading because they are losing seems like a very unlikely proposition.
Why do people think they can win, other than the fact that a few do win? Is there more than a lottery effect here?
Yes, because some things have changed. First, there was a time when commissions were so high that swinging in and out of stocks was a losing proposition from the get-go. No one could be tricked into thinking he could make money if every time he did a trade he knew he would be down big from the moment the order was executed. Yet, when commissions were hundreds of dollars, that's how it was. Now that they are pennies, folks hardly notice.
Second, the computer works so fast now that it is possible through sheer velocity to beat the humans at the switches on the
sell-side. This is the competitive advantage of the new world, one that hasn't been leveled away because the government worked hard to make it so the sell-side on the
could not eliminate those seeking to beat the system.
The analogy here is card counters at the casino. People who can count cards have a definitive advantage in Black Jack, and unless the decks are shuffled constantly, these card counters could easily break the bank.
Those same people in our business, however, aren't allowed to be banned, as the card counters are in casinos. So they can win.
Finally, the legitimizing of
technical analysis as a true investment tool has allowed people to feel they have grounding -- whether they have it or not. If you study companies and try to learn them and figure out which ones are doing right and which ones are doing wrong, it is time-consuming, difficult and taxing.
But if you just look at charts it is a snap, just a snap. Witness
Gary B. Smith's
contempt for the
fundamentals on our
TV show this weekend when he said he loved
, the stock, even as he didn't know what Amphenol, the company, did. He reveled in that.
The reason why he can do that is he is piggy-backing off the fundamental work of others via the chart. He is seeing the accumulation of others who know something about Amphenol. This method works as long as there are more fundamentalists than chartists and the fundamentalists have bigger money. But it would fail if it ever became the dominant method of investing because then there might not be a trend worth following.
I make no judgments about this whole new universe. If people make money, I am thrilled for them; if they lose, I feel bad for them. I don't care if they don't know what Amphenol does. I don't care if you call it gambling or trading or investing. In a world where stocks jump 50% in a day, who is to say that short-term investing is irrational? Is it as rational as you can get? I don't like judging people by anything other than their results. If they are good, then the methodologies are good.
But we have to understand that it is entirely possible that people could do this stuff and lose a lot of money, just like at the casinos, and yet there would be no cessation. Just more suckers to replace those blown out while they tried to enjoy the party.
Continuing to undo the gains of the NDX.
Todd-o "Hot Hand" Harrison
says the rest of the day could be like this.
, initiated with a strong buy today, is down 28. Where would it be if it hadn't been recommended?
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at