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Investing as an addiction

Investing is certainly a daily pop culture item. Internet stocks are in the limelight as they grow to new heights in the stock market. Day traders and online trading venues have sprung up all over the map. Meanwhile, financial magazines, television programs, radio shows and newspapers all offer us the latest opinion on what stock to buy and which direction the Dow will go next.

"The business section has become the sports page," remarks Mark Beauchamp, director of media relations for the North American Securities Administrators Association in Washington. "We used to read the box scores. Now, we check on our mutual funds."

But at what point does a person cross the line from savvy investor to having an addiction that requires a 12-step program?

Might as well face it, you're addicted to stocks

An addiction can occur anytime someone has complete access 24 hours a day to a compulsive process -- whether it be gambling, sex, drugs or stocks, explains Dr. J. Michael Faragher, co-director for the Metropolitan State College of Denver's Center for Addiction Studies. The fact that the stock market is slowly converting from a 9:30 a.m. to 4:00 p.m. trading regimen to a 24-hour all-access pass greatly concerns Faragher. He points out that no true addiction can occur when people can get a pause from participating in the action.

"Traditionally, the delay prevents people from becoming addicted," says Faragher. "A lot of people think the world's going to change dramatically with [24-hour] online investing. ... You look back five years from now, and this could seriously change the economy. People sell homes and cars for [gambling in] Las Vegas now -- where the odds are stacked against them. Imagine what they'll do [with uninterrupted access to stocks] when the odds are in their favor."

Patricia Farrell, licensed clinical psychologist in Englewood, N.J., adds: "It's like feeding a narcotic. People start saying, 'I have to get a T-1 line. A day trade place.' They work themselves up in a lather."

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Farrell refers to the phenomenon of day trading. Day traders -- people who buy and sell stocks on a day-to-day basis, often risking several thousand dollars at a time on a whim -- are especially susceptible to compulsive behaviors and addictive personalities. Mark Brandon, registered principal for Milestone Financial, a day trading firm in Glendale, Calif., is certainly aware of the dangers.

"People who get addicted to trading employ the same destructive habits as a gambler," Brandon suggests. "It's impossible to tell if a particular trade comes from a problem gambler or a legitimate trader. But if we see someone taking larger and larger risks, it's a sure sign of a problem."

Taking responsibility for your own actions

Brandon adds that Milestone Financial has guidelines and that a trader can't fall below a certain minimum level, which he did not disclose. He feels that regulations are not necessary to prevent an addiction to day trading. Instead, he feels that people need to exercise self-control and companies need to be honest with the day traders about the real possibility of completely losing their shirts.

"Number one for the firm to do is to make sure people understand the risk before they start," Brandon insists. "One-third of the people will lose money in a few months and quit. One-third will make a little or not make a little. One-third will make enough to justify it. Of those, one-tenth will be the superstars."

The NASAA's Beauchamp believes that the steps Brandon is taking are necessary to inform day traders of the long-shot odds against success. Still, Beauchamp feels that day trading is not for the faint of heart, and he likes to mention the current joke that asks, "Want to know how to make a million dollars? Start with two million and become a day trader."

"Additional regulation is not as important as education," Beauchamp says. "Our main concern is that firms disclose the risks instead of hiding it. It's easy to get addicted to both day trading and trading from home. It's like a drug. You feel powerful."

If it feels good, don't do it

So, what can people do to prevent themselves from becoming addicted to investing? Is there a need for local branch chapters of Investors Anonymous?

"If you have a personality toward a compulsive behavior, it will become a problem," Beauchamp stresses. "People need to take their own temperature before they get into day trading and online trading. They periodically need to make sure it's not ruling their lives. ... If it takes over your life, and your relationships and health begin to suffer, you need to take a step back."

When coping with an addiction to any problem, from gambling to sex to investing, a person has to admit the problem from within. Otherwise, like a cancer, the addiction will grow.

"Similar to racetracks and casinos, firms shouldn't be Big Brother," Farrell states. "It's a personal responsibility. You can't play it off on the other person. Like a problem with alcohol, people tell you to stop. But you have to decide for yourself.

"Whenever you want to do something impulsively, give yourself 15 minutes to a half-hour to get away and come back. Look at the reasons not to do it. If the reasons not to do it are still there, then don't do it. Break that compulsive cycle."

Beauchamp warns that people typically get addicted to things that give them pleasure. Too much of a good thing is just that: too much.

"People are addicted to anything that feels good," he cautions. "People will follow Internet stocks for the positive reinforcement when it goes up five ... 10 ... 100 points. They'll jump on the next one. People don't get addicted to stuff that feels bad -- except S&M clubs. Most people like to repeat something that feels good."

We make money the old-fashioned way ... we earn it

Finally, Beauchamp reminds people that the first rule of non-compulsive investing is to buy and hold. He cites his parents as an example of the proper way to invest. Beauchamp says they were middle-class people who held their investments for 30 years. Today, they are making a very comfortable living.

"You don't get rich quick. You get rich slowly," he advises. "Real wealth is earned the old-fashioned way. Don't get swept up in manias. The bubble will burst. You have to be skeptical. ... I'll match my parents' performance with any day-trading whiz kid. The day trader will wind up with an ulcer and addicted to Coke and coffee."

-- Posted: March 23, 1999

 

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