Drawing the Line

By James J. Cramer

Do-it-yourself investors and full-time day traders couldn't have less in common. One group researches stocks, tries to get comfortable with the products and the financials, and then buys and holds. The other does little research, never wants to be comfortable with the stocks, and buys and sells the stocks over and over again. Yet the media can't tell them apart. As the New York Times stated so ineloquently in its umpteenth article lumping together these diametrically opposed camps, they are both part of the "do-it-yourself craze" that is causing people to lose millions and millions of dollars every day wagering on the stock market.

Both trends are new. For as long as there have been stocks, we've been taught that you need a professional broker to help figure out your finances. But the Web has brought monumental changes to investing. Individuals can trade for the same low costs as institutions and can get plenty of timely information. The Web has empowered many people to take over the reins of their portfolios.

Investing by yourself has its disadvantages. It is a solitary experience involving a subject--the market--that can be bizarre and irrational at times. Yet judging from the swollen ranks of practitioners, many people genuinely like it. They treat the stock market like a giant store, picking out their favorite merchandise, the Intels and the Ciscos, and buying when the market throws a periodic sale. They use weakness--the dips--to buy, and this has been the single best investment strategy for a decade.

The day traders, who have overnight become a reviled cohort, have an entirely different credo. They trade stocks, particularly the newer, unseasoned Dot.coms off of "the action." They buy strength and sell weakness. A day trader can't have any conviction or belief in any company if he has to be out of the stock at the bell.

In my years of running money professionally, I always marveled at how few people could predict the direction of the next point or two. Irrational factors, chance motions and temporary buy-and-sell imbalances are almost impossible to forecast.

Nevertheless, a considerable day-trading industry has blossomed predicated upon the notion that technology and low commissions have simplified the task of catching that next point.

There's just one catch: it can't be done. A report from the Day Trading Project Group of the North American Securities Administrators Association showed conclusively last week that the majority of people attempting to day-trade professionally lose "everything they invest." Does this sound similar to casino gambling? It is. Both involve bets on random moves that come with heavy tariffs and that ensure it's a rare gambler who can beat the house over time.

The media do a disservice to those who devote time and energy enough to research and pick stocks themselves to castigate them as gamblers. These are precisely the people who have racked up the best returns in this bull market. And we lend too much of a veneer of professionalism to those who would gamble away life savings on random, short-term moves. Let's stop confusing these two contingents before we scare those who have the confidence and skills to be their own adviser and embolden those who should know better than to bet instead of invest.

Cramer runs a hedge fund and writes for theStreet.com He is long Cisco, Microsoft and Intel. This column should not be construed as advice to buy or sell stocks