Don Steinmann's Investment Tip of the Week

Don Steinmann's
Investment Tip of the Week

What NASDAQ Says About IPOs and Day Trading

A couple of weeks ago I was at a talk given by the Nasdaq stock market to a number of portfolio managers. The presentation was done by Alfred Berkeley, president of the Nasdaq Stock Market. Mostly what they were doing was talking about what the Nasdaq is up to and what they are going to be doing in the next few years, as you would expect. But what I found intriguing was when we came to the question and answer period. There were some interesting questions asked and some really surprising answers.

One person asked them about the day trading phenomenon. Mr. Berkeley answered by saying that there are three kinds of people in the market right now, investors, speculators and gamblers. He said the gamblers are the 5,000 people who sit at trading parlors and day trade. He said that these gamblers are ‘sick’ (his word, not mine) and need help. He went on to say it’s a difficult social problem. On the one hand people should be free to trade stocks when they want. But on the other hand we allow it to be used by gamblers in a way that has nothing to do with investing. I was very surprised he used such strong language about such good customers.

Another person asked about the pricing of, and the recent run up of many IPOs after they start trading. He responded by saying that the run up in prices was a social, not an economic phenomenon. It was much more related to crowd psychology than to anything having to do with the stocks. Doing something because your neighbor is doing it, not for any real economic reason. He said that in fact to study this idea he had spent some time at a large aquarium studying the movement patterns of schools of fish. I am NOT making this up. He said that they were trying to glean some sense of crowd psychology by studying the coordinated and sudden movements of entire schools of fish.

These are surprising words coming from an organization that is benefiting from these people. Nasdaq makes a lot of money off of IPO trades, and certainly from day trader volume. But they are concerned about the long term effects about non-economic stock market trading. Next time you talk to someone who wants to day trade for a living, or get in on the next hot IPO because Fred next door did, you might want to remind them of a couple of things. First, that stocks are investment vehicles, not numbers on a roulette wheel. Second, that you purchase a stock because it’s a good investment, not because their barber bought some. In the long run, it’s the quality of the stocks, not fads or manias that will make them money.

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