Day-trading retirees? They're blowing bubbles Irrational exuberance is back and 'I'm mad as hell!' By Paul B. Farrell, MarketWatch Last Update: 6:31 PM ET June 5, 2005 ----------------------------------------------------------- ARROYO GRANDE, Calif. (MarketWatch) -- Remember the 1976 movie, "Network;" the over-the-top warning of the anchorman screaming at people to open their windows and shout: "I'm mad as hell, and I'm not going to take this anymore!" Well, folks, that's how I feel. No more mincing words. I worked at Morgan Stanley during the 1970s market collapse and have been through a few since. And lately I'm seeing telltale signs everywhere warning us that despite all the bullish propaganda, a bubble's about to burst. Something will pull the trigger -- real estate, hedge funds, deficits, something. One reader email convinced me we're going over the edge. Jack (not his real name) went to a seminar promoting an active stock-trading system: "Boy, does this sound like a great way to make money in the stock market during my retirement years. The class only costs a few thousand. I'm thinking about signing up and playing with $50,000 of my retirement funds. What do you think?" "Playing" the market? Great way to make money? For a retiree? I think he's nuts! Remember "irrational exuberance?" It's back! The lessons of the 2000 crash? Forgotten. Even if Jack has a few million and can afford to lose $50,000, his timing is bad. Plus the odds are against winning. And "playing the market" is the wrong message when our national savings rate has fallen to zero and the average retirement nest egg is not even $50,000. Risking good money to "play the market" is as stupid and irresponsible as buying million-dollar condos with nothing-down, interest-only loans and hoping to flip them within six months to make a buck before the bubble bursts. It's not investing, it's gambling. And if I sound too blunt, good! Someone has to warn America's naÃ¯ve, passive investors about all the bullish hype and hoopla. One thing I've learned from long experience, including a few years publishing a market-timing newsletter, is that very few of America's 95 million investors are psychologically strong enough to be successful traders; 99% will lose like they did in the 2000-2002 bear market. Here's why: Investors buy high, sell low, lose. Morningstar research says fund investors are bad market timers, buying and selling at the wrong time. Greed gets them in at the top of a bull cycle. Fear pushes them out at the bottom. They lose both ways. Markets are random, irrational, unpredictable. Wharton School economist Jeremy Siegel studied 120 of the biggest up and down days between 1801 and 2001. Only 30 could be explained. The market is random 75% of the time. You cannot predict the unpredictable. We're too optimistic, gamble, deny losses. Behavioral-finance experts say investors have an "optimism bias." Too much confidence. We overestimate our skills and our grasp of the market. We underestimate risks. Then we forget about our losses, even tell researchers we're beating the market when our returns are less than inflation. That's denial. The more you trade the less you earn. Behavioral-finance professors Terry Odean and Brad Barber researched the portfolios of 66,400 investors. They compared the returns of the most-active traders with the passive buy-and-hold investors. Active traders averaged 11.4% versus 18.5% for the passive investors. Two reasons: Active trading increases transaction costs. And more trading meant more losing trades. Trading online makes losing easier. Another study by Odean and Barber showed that investors lost more when they went online. Before they were beating the market by 2%. After they fell under the market by 3%. We take more risks online and lose more as a result. Even winning traders are losers. Trading is not the get-rich-quick scheme that financial newsletters and trading-system gurus want you to believe. One study by the North American Securities Administration Association found that 77% of day-traders lose money. The "winners" total take averaged $22,000. Yes, I'm mad ... you should be too! Irrational exuberance is back. I feel it growing. I listen to the hype all day. And I hear the denials. Something's wrong. When retirees want to gamble and waste good money, we're nearing the top of a bubble. So I'm screaming: "I'm as mad as hell, and I'm not going to take this any anymore!" Today I'm on the soapbox! Forget about "playing the market" folks. You're gambling not investing. The odds are against you. Don't do it if you're a retiree. Don't if you're a boomer, a forty-year-old with kids in school, or a college kid. You'll lose. Protect your nest egg!