What to Tell Clients Tempted by 'Davey Day Trader'

Stock photo of crowd watching sports and drinking

One of the more fascinating outcomes of the coronavirus pandemic has been the resurgence of day trading, led by Barstool Sports founder Dave "Davey Day Trader" Portnoy.

Portnoy had only purchased one stock in his life before the lockdowns were imposed. When professional sports were canceled across the board, he turned his sports gambling focused content to the stock market.

This has helped encourage millions of followers and new investors to move into the markets, pursuing speculative trades — some for the sake of the entertainment value.

While we all thought that people had learned their day trading lessons during the dot-com crash in the early 2000s, a new generation of traders who were not around 20 years ago are into the markets, and in a big way.

So much so, that there has been a social media blitz led by Portnoy on the opportunities for speculating on the markets that are filling the time and attention of bored, cooped-up, mostly younger people.

"I'm sure Warren Buffett is a great guy, but when it comes to stocks, he's washed up. I'm the captain now," Portnoy tweeted recently regarding Buffett's negative views on airlines, while their beaten-down stocks have recently rallied dramatically, providing fuel for Davey Day Trader's claims.

(He has 1.7 million followers on Twitter, and his profile states, "I'm not a financial advisor. Don't trust anything I say about stocks.")

Another headline-grabbing move by Portnoy was to randomly pull letter tiles from a Scrabble bag and invest in the first ticker symbol that those tiles spelled out, which ended up being RTX, which is Raytheon's stock symbol.

Portnoy then proceeded to livestream investing $200,000 in that stock, mocking investment professionals by claiming that he would outperform them, setting off a social media frenzy.

While Portnoy may ultimately end up losing money on the Raytheon trade, he couldn't care less. He will have more than made up for any losses in additional eyeballs and followers, adding to his media empire as they all look to see what crazy antics he'll come up with next. File that trade under "brilliant marketing!"

To further reinforce the gambling format of Portnoy and Barstool Sports, casino company Penn National Gaming announced that it had bought a stake in Barstool for $163 million in cash and stock earlier this year.

Day Trading Craze

But it's not just Davey Day Trader that has an interest in the stock market as a tempting place to make quick money, it's also the trading platforms themselves that are profiting from the recent trading volumes.

One of the main beneficiaries of the day trading movement has been the mobile app Robinhood, which pioneered free trading to entice younger, more price-sensitive people to enter the markets. Offering a slick, easy-to-use interface that drops confetti on the screen when users make a trade, they are "gamifying" trading to encourage activity.

While it all sounds fun and entertaining when the markets are rallying, we all know that stocks do not go up all of the time and there is always a reckoning. Particularly for newer investors, and even experienced investors saddled with FOMO (fear of missing out), it can become too enticing to stay away, despite the dangers.

The Advisor Angle

What should advisors be thinking about and preparing for these types of client conversations?

What we are telling our advisors is to provide clients with solid data, research and common-sense advice on how to put in perspective that day trading is not sustainable, while at the same time acknowledging people's innate proclivities for risk-taking and behavioral finance nuances that tempt them to go down the easy-money path.

By doing so, we hope to keep clients focused on the long-term financial and investment plans that their advisors have developed for them.

But because the world is not a perfect place, here are three talking points that might be of help:

Gambling: Day trading in the markets is exactly that, pure speculation. Countless academic studies of individual traders in markets in the U.S. and internationally have shown that active trading absolutely loses money over time — it's simply not a sustainable strategy.

Accordingly, by coaching your clients that if they do want to engage in this type of trading, they should expect that money to go to zero, just like an evening at a casino. Therefore, they should consciously allocate no more than a tiny percentage of their portfolio to this type of trading — less than 1%.

Deceptive marketing: The compelling offers of "free trading" by the various trading platforms, combined with "gamified" interfaces encourage users to make trades. They do this because they're making profits by selling that order flow to institutional traders and harvesting revenues from uninvested cash balances.

"Free trading" is most definitely not free.

Explaining the conflicts of interest that these trading platforms inherently have, perhaps even likening them to the tobacco companies marketing to young people or using flavors to encourage vaping among teens, may break through to clients that they are being misled and that there is real potential for financial harm.

Perhaps these trading platforms should come with the same warning labels that cigarettes do?

Authenticity: Because financial advisors also may have a conflict of interest by discouraging this type of trading, be sure to acknowledge this point up front. Clients are savvy enough to know that you collect less in fees if they withdraw money from you.

So don't sound defensive. Be positive and acknowledge that investors can learn from this experience and may ultimately become more engaged in saving and investing for their futures.

Ultimately, this is a chance for advisors to once again show your value in helping clients avoid the tempting pitfalls of active trading, while educating them on the dangers of false prophets and charlatans like Davey Day Trader.

Don Calcagni is chief investment officer of Mercer Advisors; he also holds the CFP designation, QPA designation from the American Society of Pension Professionals and Actuaries, and ERPA designation from the Internal Revenue Service. He earned an MBA in finance from the University of Chicago and a masters degree in taxation from Widener University.