And then they said… “💎✋ hold the line! 💎✋”
New Retail Investors are Riding on Huge Gains
If you’ve opened up the news in the past few days, you’ve probably seen someone talking their head off about how Gamestop stock is on an absolute roller coaster and how incredibly unrealistic its current valuation is at. Hedge funds are hemorrhaging billions of dollars while a sea of redditors on WallStreetBets have made themselves a small fortune. The most famous of which is u/DeepF**kingValue on Reddit who has transformed $50k into $40+MM at the peak.
If you’re new to investing, seeing all of these people make an absolute fortune on the stock market is bound to cause some serious FOMO. At any point in the week there’s stocks going up 100% or more in a single trading day. The surge of gains is going to be an irresistible lure for anyone interested in investing.
Unfortunately, even if you make money trading the short squeeze on Gamestop, you still might end up losing money. The danger isn’t even the volatility in these various “meme” stocks. It’s the habits you are training yourself to subconsciously believe.
In most situations if you witness a stock grow 5x or 10x you might just chalk it up to a once in a lifetime occurrence. When you see Gamestop surge over 1000% in a month, AMC jump up 500% in the same time, or Dogecoin rise 800% in a few hours you are subconsciously training yourself to believe that this is the new normal. It doesn’t help that each day, the millions of other redditors on WallStreetBets are posting their insane profits thus furthering this rhetoric.
Don’t get used to the idea of seeing double or triple digit returns daily or else you’ll get burned badly. Investing can be immensely rewarding and in many cases is the most consistent and reliable way for an individual to become a millionaire. Speculative investing is an entirely different concept. Trading equities on a hyped up trend could be seen as momentum trading to some and straight up gambling to others. Take care in how you dabble in the markets as just as quickly as Gamestop might have shot to the moon, it can all come crashing back down.
Investing is Boring
Personally, I like to think that investing should be boring. If investing was really as exciting as the media is pointing out right now, I think we would definitely have quite a few more finance majors out in the world or at least a few more people successfully making a living off their investments.
Instead, there are companies such as Robinhood that have given investing an artfully designed user interface that gamifies the entire investing experience. Many new investors seeing explosions of confetti on their phone screens after buying a stock might be led astray from what investing should actually be. Investing may be like many other games but at the end of the day the money invested is real. It is the same money you use to pay your bills or to take a nice vacation. The fundamentals to investing are increasingly important in successfully managing your assets.
In order to be successful you might have to spend hours and years understanding how the markets function. It takes time to understand the true value proposition of companies and it is not easy to stay logical throughout all investment decisions. Sometimes, you might have a gut feeling that a trade might work out. I sometimes throw out a few yolo trades, but when I do, I understand that those yolo’s are just for fun and make sure that I only put in what I can afford to lose.
Although this might have all seemed quite negative on the state of new retail investors flooding the markets, this might actually be the change that everyone needed. There is now a higher interest in investing and desire to learn greater than ever before. The average savings rate in the United States has hovered around 7% in the last decade but in recent months has more than doubled to over 15%(33.7% at the height of the pandemic in April 2020). As a whole, investors are starting to save more and start investing. As this trend continues we might see a silver lining as each new generation starts preparing earlier and smarter for their financial future.
This article is for informational purposes only not all information will be accurate. This should not be considered Financial or Legal Advice. Consult a financial professional before making any significant financial decisions.