It’s Not a Gambling Problem if You’re Winning, Right?

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  1. Become A Rational Investor
Photo by Bermix Studio on Unsplash

The nonsense-based system of investing is finally being exposed. Markets are not perfect — nothing that contains large elements of humanity will be — but they will tend to match reality after a time. That’s been a hard lesson for many who poured money into overhyped technology stocks and other “meme” trends hoping for continued exponential gains.

Looking at my account history, my first stock purchase was in 2005 (Electronic Arts, interestingly). In the 17 years since then, I have never witnessed such a large number of uneducated and misguided investors in the market at once as I have in the last 18 months or so. I suppose, had I been investing at the time, the late 1990s might have rivaled it, but I’m not so sure.

Fear of missing out has been the driving force for many of these new “investors.” Suckered in by the plethora of pieces written by pump-and-dump salespeople advertising their 1,000% gains in crypto, technology, or other trends, millions of amateurs dumped their money into a system few understood or bothered to learn.

To the surprise of many, it appeared to be working. For a time. But as any seasoned roulette player could tell you, nothing lasts forever. Depending on luck and luck alone will eventually leave you exposed to the harshest force of all — reality. That lesson has been learned the hard way by many in the last few months. Now we must deal with the aftermath.

Unsupportable

Pure momentum and speculation cannot hold asset prices high by themselves indefinitely. The other side of that equation is what we’re witnessing now. Imagine a watchtower with four pillars, but with three of them gone. The tower is bound to fall, but there’s a crowd of people on the side it’s leaning to and they’re pushing it back upright with all their strength. It’ll remain standing for now, but eventually, those folks are going to run out of strength and the thing’s going to collapse.

That’s what we’re seeing with a lot of the “meme” stocks and other overhyped nonsense. The naïve, FOMO-based money is running out. As it does, with no incoming support from hedge funds, seasoned investors, or other institutions, the asset falls back to reality.

AMC is down 75% from its June 2021 highs. Gamestop is down about 50% over the same time period. Snapchat has lost about $45,000,000,000 in market value just in the last six months. Bitcoin is down about 43% since November. The brokerage widely associated with this nonsense — Robinhood — hasn’t fared well either, to say the least.

If you’d put $100,000 each into five of the “trendiest” asset choices this time last year you’d have lost a little over $186,000 by now. Even with the market doing extraordinarily poorly of late, an S&P index fund would be close to dead even in the same period. Common sense and fundamentals tend to win out in the long run.

Image by the author. Based on market prices as-of May 6th, 2022 and close of markets on May 28th, 2021.

But it’s easy to forget that when carnival barkers are shoving their “exponential” and “tremendous” earnings down your throat every day. Articles abound — this guy made $2,000,000, this woman $3,000,000. There’s no guarantee they’re even telling the truth. Even if they are, past performance is no guarantee of future returns. They may have gotten lucky. Once. Maybe even twice. The conditions that allowed that to happen may never be replicated. There is no sense in chasing another person’s story.

For whatever reason, the human mind has an easier time envisioning ourselves coming into a lot of money than it does imagining us losing the money we already have. This is why casinos do well. It’s why people who don’t understand the first thing about cryptocurrency invest in it. It’s why “momentum” can carry a stock price far outside the range that is supported by actual financial information. Hope springs eternal.

“There is no such thing as a reliable get-rich-quick scheme.”

Even those who did get lucky enough to time some of these extremely volatile assets correctly may not have walked away with the money. Many were lured into a false sense of security by their temporary gains and held on to those assets. Others saw rising prices as proof of concept and put more money into the same investments. Both are licking their wounds today.

Be sensible

This is all a shame. Particularly because getting the uninterested folks involved in their personal finance is a worthwhile goal and difficult task. It’s made all the more difficult when they’ve been burned once before while listening to some misguided gibberish written by an (at best) ambivalent author.

There has to be a better way to get people involved in planning their future. False promises of tremendous riches and early retirement call to mind fairy tales, not sensible planning. Then, when things inevitably and suddenly went south, panic set in. The fairy tale ended. Carriages returned to pumpkins.

Maybe it’s time we try a little negative reinforcement instead of positive. If you don’t get involved in the market you’ll have to work forever and die at your desk. A little morbid, maybe. I’ll work on it.

Photo by Andrey Metelev on Unsplash

In the meantime, we have to welcome back those who fell for the frenzy of meme stocks and speculative purchases and do so with open arms. With pension plans largely gone and government safety nets largely not providing enough to live off of, people have to invest and do so wisely. It’s the only path left to increase our financial security in the future. People turning away from investing are likely to be worse off than those who stick with it.

The snake oil salesmen are louder and more omnipresent. Understated and sensible rarely wins the day. People would rather believe they can retire in five years at 32 years of age than listen to someone who says they can retire at 55. That’s just human nature, I suppose.

Maybe we need some salesmanship on the side of rationality. $50 saved monthly and invested at a rate of 5% is worth about $29,000 in 25 years. Perhaps using final numbers like that will create eye-popping enough figures to encourage some to save and invest. Buying a $100 phone instead of financing a phone for $100 a month in perpetuity is another $52,716. If you live in New Jersey and smoke a pack of Marlboros a day, giving that up is $140,576. “Give Up Smoking, Buy a House.”

Moving forward

My point with all of this is simple: the hot run that gamblers masquerading as investors were having is over. It’s time to get back to basics, back to reality, and back to encouraging good habits. Let us move away from the “did you hear this story about the latest new _____” drivel. The only tangible effect these pieces had was to get people to part with their money in a way that they didn’t understand.

Let’s keep the best of what that accomplished — getting people into the market — and build on it. We’ll leave behind the all-speculation, no-fundamentals advice and coked-up tone of those dispensing it. Offer advice on less risky alternatives to these momentum-based investments, and guidance on what a proper amount of savings and investing money is relative to an individual’s salary. Restart with the basics.

For those of you who’ve been burned in the market recently, don’t turn your back on it for good. Do reconsider your strategy and where you get your advice, though. For more than a century our markets have proven to be a valuable part of our financial futures if given time and patience. Tried-and-true doesn’t always have to be outdated. Sometimes, it’s just right.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.