Fifteen Minutes: Bull Market or Bull Shit?
For 15 months, Jimmy Liu '01 ate his Cheerios in front of his computer in Kentucky, not wanting to miss a trade. The infinite fluctuations of numbers became his daily grind; the NASDAQ webpage his rodeo. Liu was caught up in the adrenaline rush of day trading. "There is a euphoria of everyone playing the same game together. When it starts picking up you want to be there. If you're not, you could lose or gain thousands of dollars," he says.
Neil Sinhababu '01, co-director of the Cambridge World Fund, agrees. "You could never make a video game as complex as trading," he says. "In trading, there's this wonderful cowboy thing to it." Both love the game of trading. But, after his freshman year Liu grabbed his next three years of tuition money--some $90,000 bucks-saddled up his horse ready to lasso in the loot.
Divided between a career in business or medicine, Jimmy Liu '01 took his sophomore year off to make his decision. Because of his interest in business, he bought a satelite dish to receive stock quotes in Forest Hills, KY. He started day trading with a small piece of his future tuition. When his parents saw how successful he was, they raked over the funds for the remaining three years.
Most would call Jimmy crazy, perceiving day trading as a small step above gambling. It's high risk, high stake and equally addictive. People who try it expect to make their retirement savings from a month of day trading. Ninety percent lose everything. But, Liu is a calm, rational person. The fact that he's back at Harvard is testament to the fact that he's amongst the top 10 percent who succeeded. From 1997 to now he has profited around 250 percent. At his high, he had a 300-400 percent gross profit. That's after he paid his tuition.
With these numbers, Liu should write a book, "The Secret to My Success," unless that name's already taken. What is the secret to Liu's success? At first, Liu admits, he got slammed. He soon learned the trick: if you want to make sweet profits you need to sell, quickly. Liu holds stock for the "ultra short term" and to maximize profit, he sells as soon as possible. "The less time you hold it the more profit, but also the less sure you are of your trade." Purchased stock is "baggage" to Liu, because it ties you down until you sell it. Whether it's a couple of seconds or a couple of days, you have to get rid of the stock while it's on its way up.
Greed often runs people into debt, Liu says. People see their stock value increase by 100 or 200 percent in a day and think their good fortune is forever. Liu, wisely, would take his gains and sell, regardless of whether the stock was on the rise. After a while, Liu says, the money is just numbers on the screen. You forget the value of a dollar. Since the New York Stock Exchange runs from 9:30 a.m. to 4 p.m., day trading is a full-time job. "It takes nerves of steel, and you can't be shy about losing money. You need to invest."
Back at school, Liu still trades, but he thinks more in the long-term. Liu is not the only Harvard undergraduate quietly making profits through long-term trading. Founded in 1996, The Cambridge World Fund is a student-run organization that invests students' money, giving them early hands-on experience in the market. With 80 shareholders, the fund has about $20,000 invested. Any student can invest a minimum amount of $100, or about six shares, to become a stockholder. This year to date, the fund is up 75 percent. While less lucrative than day trading, CWF is also less risky. They do not participate in the volatile daytrading game, but make longer-term trades over days and months.
The Cambridge World Fund's meeting has a jockeying, locker-room feel. As they settle down, they curse their unlucky trades and make jokes to impress each other. There are only men in the room, although they say that about half of their stockholders are women. However, all the officers are men. Sinhababu says that he thought women would actually be better at the stock market, although they tend to participate in it less, because they would not get as excited by jumps and falls. According to Sinhababu, men are more impetuous and ready to jump into it without knowing as much about the stock.
On the woman question, Liu has a different observation. When he traded, he noticed that a good number of other traders were homebound housewives who were able to participate in the stock market through the Internet.
Concerning day traders, the members of the CWF had a decidedly negative opinion. But before the 20-minute day trader bashing began, Sinhababu noted, "People here are generally not good day traders." Indeed, Fan Wu '01 told of a few days where he cut class to trade, and watched one stock he purchased increase by 100 percent, 200 percent, and then fall to below the purchase price.
Regardless of their personal and often painful memories of day trading, they had legitimate reasons as to why it is difficult. Parag Y. Shah '02 described day trading as "playing basketball with one arm. You don't have the tools to compete with [big firms], and you have to be right so much of the time." Everyone agreed that it was a huge time commitment and a mental strain. "You just have to hope that one company will carry you," Wu said.
The CWF contended that anybody can get involved with the stock market. While profits might not be as high as Liu's, the stock market is hot and rising. And you don't have to be an Ec major to be Joe Stocktrader. Sinhababu, a philosophy concentrator, sees a lot of opportunity for humanities majors to use their analytical skills. Reading the market is like reading a text, and if you can figure out what the market is going to do before anyone else, you have the opportunity to make a lot of money.
Of course, investing in stock now is great preparation for a future at Goldman Sachs. Wu laughs at students scanning the Wall Street Journal before their I-banking interviews. "You can't just learn about it that morning," he says. "You have guys who are watching the stocks for 50 years." Shah mentioned that he routinely gets e-mails from friends frantically wanting the low-down on the stock market. "I have a form e-mail I send them," he said.
There is a whole world of stock trading at Harvard: board meetings in JCRs, annual reports e-mailed to stock holders, stock graphs monitored closely on Yahoo and cowboys like Liu and Sinhababu playing a high-stake, high-return game on the frontier of the Internet.