You know when you have a favourite band that’s kind of obscure, then they become popular and it ruins for you a bit? That’s how I’ve felt about Reddit the last few weeks.
You know when The Australian Financial Review starts talking about subreddits it’s all over. Next thing our baby boomer parents will be on there (hi dad!).
Anyway, I was as surprised as anyone to see that the Reddit army had caused a major US hedge fund to crash in what has become the Gamestop saga. I subscribed to the Wall Street Bets (WSB) sub a while back, but it was full of bros with their own weird language. I prefer the sensible money conversations over at r/FIREyFemmes (for women interested in finance).
The fact that WSB managed to send the price of a video game store up by about 1500% is wild. It hurt an established Wall Street hedge fund because they had been betting the stock’s price would go down. After all, it’s a daggy old physical store where you buy gaming DVDs – not quite a business of the future.
The hedge fund dudes had put a ‘short’ on the stock – this is a tricky little financial tool that allows you to make money if a stock goes down. When it then ended going up – and dramatically so – the hedge fund had to stump up a bunch of money. (Shorts are a type of ‘derivative’, and they are crazy complicated. I am almost sure you can live successfully without understanding their inner workings.)
Anyway, the whole thing put share trading in the headlines. ‘Retail’ investors – i.e. non-professionals like you and me – have been very active in share markets recently, and especially the US. It’s partly driven by the rise of cheap and free brokerage. In the past, buying shares was kind of expensive – like, you had to call your stockbroker and pay $50 or something per trade. That cost has been driven down by technology: you can trade for five bucks on the ASX now, and in the US, it’s free on Robinhood.
This has spawned a new generation of investors who trade shares like it’s a game – the You Only Live Once (YOLO) crowd. In fact there is a strong crossover of gamers on Reddit, and no doubt many of the bros on WSB see the whole thing as some sort of financial World of Warcraft. But there also just normal people, like you and me, having a crack at investing because they can.
If, however, if you haven’t been buying your own shares (aka ‘equities’), should you have FOMO (fear of missing out?). Not necessarily. I want to make a few points about the whole situation.
Investing is a long game: For those who started buying shares in the last year (i.e. post-pandemic), it’s been a good ride overall. If you bought after the market dip in March 2020, you may have picked up bargains and experienced some gains. Afterpay is the poster child for this: it fell to around $10 at its lowest and is now around $150 (as at 12/2/21).
But people who only bought recently, and are crowing about their success, are captives of ‘recency bias’: when we think that the things that have happened most recently are common in every period. However, just because the markets have gone gangbusters in the last few years, doesn’t mean they always do.
History tells us that the share market goes up over time, but not in a straight line. If you look at the ASX200 chart below, it starts around the time Pearl Jam changed our lives by releasing their first album, Ten. You can see it’s a bit of a wild ride over those 30-ish years (which is as far back at this charting tool goes).
I have helpfully added some emojis to reflect market sentiment. You’re welcome.
Which doesn’t mean investing in shares is bad. It just means you shouldn’t feel sad if you haven’t invested yet.
The best time to start investing in your future is today. If you missed this rally, there will be others. There will also be other corrections. We invest in shares for the long-term (I’m talking at least five years, but ideally way more than that) because time smooths out the ups and downs.
Equities are only one part of a wealth strategy. The WSB crowd would have you think that you can ride the NASDAQ all the way to the millionaires’ club. But to manage risk properly, we need to put our eggs in a few baskets. This is what diversification is all about, and I wrote a whole post on it last week.
Personally, I feel like the market is a bit ‘toppy’ at the moment. You know when you go out for champagne brunch and there is an absolute peak moment, about two glasses and one croissant in, when you feel on top of the world? You are the most glamorous woman with the most charming girlfriends ever, right? Ok, that’s where I feel like the share market is right now (I could totally be wrong though).
In the next phase, the champagne is finished, you’ve foolishly progressed to cocktails, you’ve texted your ex to give him some life advice and now you need to go to bed at 7pm … that’s a correction. You don’t know when it will come, but it will come eventually – because you’ve been having so much fun.
Sorry, I didn’t come here to spout doom and gloom. Markets are great, equities can be great, but just don’t get caught up in the hype, thinking they are an easy path to riches. Plenty of people who made thousands in the Gamestop surge lost it again, because the shares fell back to earth with a thud. Turns out the company still sells gaming DVDs to Dungeons & Dragons nerds in local malls. Not exactly the disruptor of the century.
Stock-picking is hard. Equities can be an effective way to build wealth, but picking winners on the stock market is hard, even for the professionals. I know, I work with them, and they freely admit to having made bad calls. Luckily they make plenty of good ones too.
These professionals have literally all day, every day, to research stocks. They have crazy spreadsheets, a bunch of data sources and often get to meet with company management and grill them with questions. Normal people like us can certainly have a go at direct share investments, but we need to be humble about it. Can we really outperform the experts over the long term?
This is one reason I invest passively through ETFs (more on that here). But plenty of people also pay active fund managers to do the hard yards for them, because they see it as an investment (pun intended). So if you’re not sure you have the time, motivation or skills to be a Wolf of Wall Street, just outsource it!
In summary, I just want to reassure you that:
1. You don’t have to be on Reddit to make money from shares
2. Investing in equities can be an effective way to build wealth, but should be part of a broader plan
3. If you aren’t sure about what stocks to buy, it’s totally cool to outsource it.