Looking Before You Leap
You learned your lesson. After falling victim to the dot-com delusion of the go-go late '90s, you decided to try to emulate the stock-picking superstars of yesterday who are now back in vogue. Guys like Warren Buffett and Peter Lynch, who compiled legendary investment records by buying and holding on to shares of companies whose businesses they understood and whose books they thoroughly analyzed. But more than three years into a bloody bear market, that sensible strategy probably isn't working for you either. Despite the market's recent revival, many investors will remain impatient until all those battered portfolios are back closer to even.
So it's understandable that you might consider toying with some alternative strategies. Ads and infomercials tout day trading ("it's new and improved!"), technical analysis, no-cash-down real estate, and other ventures. "I think there are a lot of investors who have given up on buy-and-hold and think there has to be another way--a way they can earn 15 to 20 percent a year on their money," says Jeremy Siegel, finance professor at the University of Pennsylvania's Wharton School and author of Stocks for the Long Run. Some of the methods are completely nutty, while others have a nugget of validity. Either way, you would probably be better off taking a pass.
Day tripping. It's tempting to say that day trading is back, but it never really went away. Sure, lots of Web sites disappeared, and traffic in the investing chat rooms is way down since the days when it was pretty easy to day trade because every stock seemed to go up, up, up. Yet there are plenty of investors still hoping a fast-and-furious investment style will drive their portfolios to fat returns. Take Yun Soo Oh Park, for instance. Better known as Tokyo Joe, Park made his name in the mid-1990s on Internet message boards plugging his hottest stock picks, and he later started his own stock advisory service on the Web. In 2000, the Securities and Exchange Commission charged him with defrauding his subscribers through a variety of means, such as inflating his stock-picking record and stock scalping. Park settled the suit without admitting or denying wrongdoing and agreed to pay $755,000.
Click on over to TokyoJoe.com, and you'll find he's still pumping out "stock alerts." E-mailing U.S. News from his base in France "near Monaco," Park writes that business is "very good. I had 6,400 [subscribers] paying $29.99 a month [and] now I have 320 paying $300 a month, one half institutional; pros listen to my picks." He still makes a handful of trades a day and writes that during the past six months his picks "have done no less than 10-500%." Asked if day trading is different now, Park replies, "Sitting in front of a computer all day scalping 10 cents is for monkeys on dope. Only makes brokerage houses rich."
Judging from Park, it's not clear that day trading has changed much. But Baron Robertson, who runs the popular Elite Trader.com Web site (17,041 members, he says) from his headquarters in Orlando, thinks it has. "We have seen a massive shift away from day trading stocks to trading index futures," he says. A popular contract is the "e-mini S&P 500," a futures instrument based on the S&P 500. Volume on the contract has risen 141 percent during the first four months of this year vs. a year ago. One reason investors may be switching, Robertson explains, is that the futures traders aren't subject to the "pattern day trading rule," which says that any customer who frequently day trades must maintain a minimum $25,000 account.
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