In this segment of “The Morning Show” on Motley Fool Live, recorded on Feb. 14, Fool.com Director of Small Cap Research, analyst Sanmeet Deo, and advisor Jim Mueller share some interesting data and tell a cautionary story about short-term trading.
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Bill Mann: My number of the day is 9%.
Sanmeet Deo: Is that the inflation number? [laughs] I hope not.
Mann: No, this is great. This is a study that a super follow on Twitter named Benn Eifert. I'm going to read his tweet because it's great. “Got some grifters out there lately pushing a narrative that the rise of broad-based, aggressive individual trading activity is somehow empowering. So here are some links below to actual research/data on the topic, both newer and older.”
In one of those, which I have put into ours, there you go, comes from this, a study by our old friends, our BFOFs. Barber, and Odean from the University of California, Davis. Brad Barber, Terrance Odean, who have basically created the category of neurofinance. They're wicked smart. They brought a couple of other wicked smarties, Xing Huang and Christopher Schwartz. They found that stocks on Robinhood on average the next month underperformed by 9%.
I'm going to put Benn Eifert's tweet up because it is study, after study after study, that just show basically the same thing. The instinct to want to trade and to want to control your financial future in the short term is almost absurdly destructive. Go ahead.
Jim Mueller: No, really. [laughs] This example is truly destructive, comically so if you're not the one doing it. This guy in Canada did a cash-out refi of his house. Given Canadian housing prices, he got a lot of money out of it. He put $479,000 into buying 200 out of the money call options on Tesla (NASDAQ: TSLA), the day before Tesla reported its fourth-quarter earnings.
Mann: I've seen the video. Is this the video?
Mueller: This is the don't ever do this video, and lost it all. I don't even think he knows what price Tesla had to get to, the strike price. The strike price was $1,000 and Tesla was trading at 900 and something before earnings. He tweeted $1,000 EOW please Elon, EOW being end of week when the option expired, the day after, two days later. Even if it got to $1,000, he would still have lost everything because he had to overcome the cost of the option before he even started making money. The cost of the option was $29 per share and he bought 200 contracts. That's 20,000 shares for half a million dollars out the door set on fire.
Deo: In a matter of like 48 hours.
Bill Mann has no position in any of the stocks mentioned. Jim Mueller, CFA has no position in any of the stocks mentioned. Sanmeet Deo owns Tesla. The Motley Fool owns and recommends Tesla. The Motley Fool has a disclosure policy.