Transcript
Paul Winkler: Investor Coaching Show. Paul Winkler can, you know, we got, we can’t go the whole show without talking about Robinhood. Can we, and GameStop. Yeah.
GameStop
Anne Sawasky: It’s still not going away. Yeah. It is not going away now. People are still talking about it and considering it.
Paul Winkler: You know what I mean? Sometimes, sometimes you just have to save people from themselves. The Robin hood traders and they’re kind of oblivious to taxes. Now check this out.
Using several, no-commission online brokers. That doesn’t mean no expenses folks. There are lots of hidden expenses in these accounts because you have markups on the stocks. You know how the companies are. They route the orders. That’s how they make money because people think, well, how do they make money? There’s no commission there. There’s plenty. Don’t worry. They’re not starving. He sometimes made more than 200 trades a day. Can you imagine that? No, gosh, No. And thousands in 2020, according to the brokerage records he provided overall, he says, he’s ahead by more than $8,000. Now here’s the thing I’m reading this article and I’m thinking, I have no idea what this guy started with.
So I have to make updates in my mind, right? So let’s say he started with $4,000. Now, US markets with small and value. You know, if you have just US markets divided between large and small and value, I just looked at, you know, my portfolio of the US side of my portfolio. So you basically have, you have $4,000 you start with, and they’re up about 40% from July. So that basically takes, you know, if you have that $20,000, if you invested that much, there’s your $8,000 right there. But, but deeper than that, forget about that. Forget about market movements over the spirit of time.
The Psychology Behind It
Here’s the psychology. Often people reading, something like this, they’re going to think, man. I mean he made $8,000. I can make as much money doing that as with my part-time job. And they don’t think about the fact that this person happened to be interviewed because they happened to do well. Or they had a decent level of returns and just happened to make a profit over the period of time that they happened to be interviewed about.
Anne Sawasky: And we don’t even know that he made a decent level of return. We just know he made $8,000.
Paul Winkler: Well, that’s true. We don’t know. He may have had a hundred thousand. It was really, really bad. Yeah. So, but consider this, this guy made 200 trades a day at times, let’s say that he took three minutes per trade. That’s 600 minutes. That’s 10 hours. Not including bathroom breaks. He made thousands of trades is what it says in the article over the last year. So let’s say this 10,000 trades. I don’t know how many trades he made in three minutes. That’s 30,000 minutes or 500 hours. That’s an $8,000 profit.
That’s $16 an hour on my calculator and I’m thinking about it.
Anne Sawasky: And, and then he has to pay tax on it. Oh yeah, yeah. Yeah. I mean, it’s really not even that.
Paul Winkler: I mean that’s 20% less pay, $16 per hour, than the average hourly wage for a telecom salesperson in Nashville.
Anne Sawasky: Yeah, exactly. And, and the funny thing is this same article talks about now a lot of these people who started doing this, they have no idea that, Oh, you mean I have to pay tax. I get this 1099. What do I have to do with this 1099? So he used to do his own taxes. Now he’s got to pay somebody to do this. Exactly. Which is very expensive because there are 34 pages. Right. So it’s, it’s, there’s also that expense. So, you think about, is he really making that much money when you factor in the short-term capital gains, which is ordinary?
Paul Winkler: No, we already determined the amount of hours spent doing his own job, what he did.
Anne Sawasky: Yeah, exactly. I mean, it’s so, so they don’t really realize often the ramifications of what they’re doing.
Crazes Happen
Paul Winkler: Yeah. I think that that’s so, so true that people don’t really think about that. And you know, they had, they looked at these people that a large number of these traders, they said hood markets, which brought a flood of first-time traders into the markets for the first time last year, it said in the article. Right. And especially with the GameStop frenzy, they said, so, and there was another article about GameStop itself and it said that it, and what was it? I guess it was Friday. I think it was, yeah, it was last Friday. Pamela was sitting in front of Michael Dell Giorno and she started talking about GameStop and she said, I don’t understand this.
And I called up and I said, Pamela, let me explain it to you. You know, here’s what I see going on. And I explained what shorting was and how it worked. And, and she goes, man, this is kind of crazy. I said, you know, I think about the different frenzies that we’ve been through historically. And you know, you look at the South sea bubble, a South sea trading company and that whole debacle, and then the tulip bulb, 16 hundreds of tulip bulb craze, and, and where people were buying tulip bulbs and they were bidding up the price and bidding up the price. And literally it got to the point where a tulip bulb was selling for the cost of a house until somebody said, you know, I can’t imagine that I don’t care how nice a variegated tool of this is.
It can’t be worth what a house is. And all of a sudden the whole thing collapsed. Well, the same thing was going on with this. It was selling for over 60, according to Morningstar’s data that I was looking at that day, it was selling for 60 times book value. And historically the S&P 500 is a 2.4. You know? So we’re looking at a company that was selling for an insanely high price. And I just said, it’s a matter of time before it comes down. I can’t imagine it’ll take too long, but I didn’t know when, and as of Friday, it was 63.77 a share.
At one point I thought it was interesting. It briefly became the largest company in the Russell 2000 index. Is that not funny? It reminds me of Camelot, a brief shining moment, but it was Camelot. Wow. It briefly became the largest company in the index and then an 80% decline in value. And they had this other guy, Carlos Diaz, 23-year-old software salesman based in Atlanta, says his $3,000 account is up more than 30% in the past year. But he says, he’s only starting to learn about how losses can offset gains and the timing issues that come into play.
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Nobody Gets Famous for Losing Money
Well, I looked at this and my point here is this, this is another dangerous situation. Someone gets lucky. And what they do is they attribute it to skill. This is often what happens with investors. Again, another person that happens to be interviewed because he happened to have a gain and happened to be at the right time in a stock that happened to be in the news. But this guy is a software salesman right now. I can only imagine that what a software salesman would be attracted to would be maybe software stocks, maybe tech companies. What do you want to invest in? So what I did is I looked at how much that area of the market is up over the last year.
Because he made a 30% gain, right? He’s up 30% over the last year, probably thinking that he’s pretty good at this investing thing. Yeah. Meanwhile the US tech fund is up 45% over the same period of time. So that’s a 15% relative loss—is the way I would look at that. Everybody’s a genius in the bull market. Now I’m not suggesting that you go out and buy this fund now because it has to be up 45%. It happens to be a period in time when technology stocks did well because of a virus that happened to be ravaging America, creating a demand for people using technology companies.
So they happen to get a lot of profitability from it. But again, yeah, back to the, the you’re you’re talking about the tax ramifications of this, you know, it’s a, the article says that nobody wants a loss, but the tax code allows investors to put them to good use by offsetting capital gains. So if a trader has a $10,000 capital gain and $9,000 of losses after sales in the same calendar year, then what they can do is they can offset the capital gain with the loss. So they got a $10,000 gain and they got a $9,000 loss. Now they only have a $1,000 gain. And then what happens is, let’s say, they’ve got on the other hand, $9,000 in gains and 10,000 of losses, then they have a loss of a thousand bucks.
Now what happens is let’s say that you have a big, big loss. You’re one of these people that you didn’t just mess up a little, you messed up a lot and now you have a big loss. Well, you’re limited to $3,000, right? Against your regular income per year
Anne Sawasky: Here, carry that over. But that it may take you yeah, exactly.
Taxes Are Involved
Paul Winkler: To get benefit from that loss. So you had the pain of losing, you know, but it reminds me of the old thing that says, you know, we used to do with the coin. You go to your friend, Hey, do you want to play? You know, we’ll flip the coin heads I win, tails you lose. That’s the government: heads, they win and tails, you lose. And I mean, they get the benefit either way.
Anne Sawasky: Well, and the other thing the article brought up too, which is something you need to think about when you’re doing this is, you know, when you have an income and you get paid, your employer well in the government requires them to take out tax holdings. Yes. Withholding tax. So that at the end of the year, you don’t really usually have a surprise when you’re filing right now with all of these people that have any gain. And very often it is short-term gain. So it’s ordinary income at the highest rates. Right. Nobody is withholding anything for that. So you can have a real, shocking tax bill as well.
Paul Winkler: Yeah. Yeah. And, and you’re not thinking about that, but then all of a sudden you have to pay taxes at the end of the year and you don’t have any withholding and you’re going, Whoa, wait a minute. And, and you know, I, you know, I didn’t think about this, but what if, gosh, I guess, you know, if you had a gain in one year, just kind of thinking through this and you had taxes on it and then you owe taxes and you pay the taxes and the following year, but you happen to have lost all your gains.
Yeah, yeah. That, that could be a real issue. So yeah, this, this could be a real problem. And you know, I thought it was interesting. They also brought up how let’s say that you, you could, let’s say that you were a day trader and you wanted to use your day trading activity as a job, you know, so you could have some day traders actually say their activity is a bonafide business. You know, so among other things, traders can often trade for at least four hours a day on an average of four days, a week in a given year and make them make more than 720 trades. So that’s the requirement to call it a job. But if you’re going to trade that much, you probably better either have a night job or be living on the Pacific coast.
You know, because that way the markets open late enough after you’re finished with work or, you know, excuse me, that it opens early enough and you can work in, you can actually do your trading before you go into work. So you traded in the morning and, you know, do some stuff at lunch, I guess, and try to make it. But you know, the reality of it is that even with a bonafide business and being able to write off some things, some of your expenses. I saw that in the late nineties, so often where people were trading and trading and, and you know, the market was going up in tech stocks were just skyrocketing and people were starting investment clubs and talking about how great they were and then they lost it all. And all of a sudden that activity dried up miraculously in the early two thousands. So, there’s something in there when they’re an article about parents being a little bit worried about their kids.
Robinhood Appeals to Kids
Anne Sawasky: Yeah, and this I thought was really interesting because with this Robinhood app, that’s appealing to kids.
Paul Winkler: Because they have all the gambling kind of stuff where they have, you know, like where they have ticker-tape dropping when you buy a stock and all that kind of stuff. Right. Don’t they, well, they, they make it out to be like, Oh, we just bought a stock. Woo. And they appeal to the parts of your brain, the amygdala and the parts of your brain that don’t necessarily cognitively process. So well below the age of 25 for females and below the age of 27 for males. Right. So it’s, it’s very easy to get sucked in.
Anne Sawasky: So, they, they actually say the median age of users on Robinhood last year was 31 as opposed to other online sites like Schwab where the average is 52. So, so this article here is talking about how these young kids, now these are kids, these are not adults. These are kids that are taking their life savings.
Paul Winkler: Yeah. Maybe allowances or whatever they’ve gotten. Yeah.
Anne Sawasky: So like this one kid, he was 14. Oh my goodness. And he took $10,000. He had a custodial account opened by his father and he sold all of his good stuff and bought shares of game stop, just because he saw it online, you know? And that was the big thing to do with taxes. Well, but not only that, here’s the thing. It’s interesting because his parents said, they, they don’t care really if they’re winning or losing. I think he thinks he’s making history.
He just doesn’t care if he wins or loses because he’s a kid and he has this long-term time horizon. And he’s just like, I’m just doing it to get to the man. And I don’t care.
Paul Winkler: You know, it’s interesting when this all came out and that is something I said here on the show, I made the comment that there we were talking about and we were talking about gains. And I think it was Ira and Evan were on here with me. And I said, you know, a lot of these people don’t care if they make any money there, it’s like going and occupying Wall Street. Yeah. They spent money to go to Wall Street and camp and do all that stuff. And they paid money to make a statement.
Anne Sawasky: Right. So, so here you have these parents now with kids, if they’re, you know, if they’re not the age of majority, which is going to be 18 or 21, depending on the state, right. They need a parent to set up the account. Right. So they have a custodial account, but the account is owned by the kid. Yeah. So
Kitty Taxes
Paul Winkler: What about the taxes? Well, does it talk about kitty taxes?
Anne Sawasky: It does. So, so here’s the thing. The parent needs to set up the account, but then the kid can control it and there are taxes and the kids don’t know there are taxes. So, you know, they can have thousands or multi, you know, a good amount of gain. But then at the end of the year, they don’t realize there’s tax. And there is, you know, basically, the first 1100 is tax-exempt in many cases.
The kitty tax means that the child is taxed at the parent’s rate. So again, they think they’re making all this money and suddenly they have a really big tax bill, which by the way, they didn’t take money out for, because you know, right. We’re talking about that.
Paul Winkler: And they don’t have a job to run the taxes, supposedly where’s that money.
Anne Sawasky: It comes to be a problem. And then the other thing they’re talking about is that they can cause them, it can actually affect their financial aid in college because those custodial accounts are, they count against your assets in terms of your eligibility for financial aid. So they’re saying that some of these kids are going to be getting maybe 20% less in financial aid because of this.
There are interesting ramifications to this that you just don’t even think about. Yes. And the funny thing is this one kid, he says his parents aren’t really that happy with the time he’s trading and posting online. He goes, I don’t really know if they really understand what I’m doing.
Paul Winkler: No, no, no, no, no. That is such a typical kid. You know, it’s funny because there’s actually a psychological concept that, and this is something that kids go through and you’ve heard it before. They just don’t understand it. I need to remember what this is called. But basically it is the belief that kids go through, that nobody has ever been through what they’ve been through. And they just, they’re just not understood. That is very typical. Realize it’s a bonafide psychiatric concept.
Anne Sawasky: Parents are trying to tell them what to do. They’re not listening. They don’t understand.
Paul Winkler: Good luck. Of course, nobody understands me. You’ve never through what I’ve been through. You’ve never been a teenager before.
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