The Gamification of Investing
Wall Street was buzzing last week, all because of a Reddit thread that caused the stock prices of companies like GameStop and AMC to surge. Many people have never been on Reddit or don’t even know what it is. Essentially, it is a message board where people can discuss almost anything and recently the hot topic has been stock trading. To summarize recent events, Wall Street hedge funds have been shorting stocks (betting against them) with the goal of profiting if these stocks go down. This has been a common occurrence for many years, but social media and the internet has thrown a wrench into their plans. A Reddit thread went viral recently and online traders caused the stocks of those shorted companies to surge, creating what’s called a short squeeze. Many individuals with little investment experience made a lot of money very quickly, while the hedge funds and their clients mounted serious losses.
There are many reasons why this may be happening now. Some will point to stimulus checks, behaviors due to COVID/quarantining, or even politics. Others will say it’s due to the numerous trading apps created in the last couple years where one can buy stocks and options at no cost. While the trades themselves may be “free,” that does not mean there isn’t a potential cost (losing all your money). The stated goal of many of these apps is to “democratize finance,” enabling everyone to have access to financial markets. This is true in many ways, but it has become quite complicated.
Technology continues to change our lives every single day and these trading apps are a great example of that. They have begun to “gamify” investing to attract a new type of user. The gamification of industries isn’t a new concept. It’s essentially what Fit Bit, and more recently Apple Watch did in helping its customers get their 10,000 steps in per day. This is also how Peloton has created spin fanatics, especially in the work/stay/play from home world we’ve been living in. The goal is to make a product or experience more engaging so you’ll stick with it, or more realistically, so those companies can sell more of it. Personally, I’m much more committed to clip into my Peloton bike and join a community of riders versus a standard stationary bike in the corner of my bedroom (if you want to join the growing Mainspring team of riders, look us up!). However, fitness is very different than investing.
That’s not to say that I don’t believe in what these companies are trying to do. I’m passionate about ALL investors having access to financial tools. I also love seeing finance become a bit more fun as it increases the interest from young investors. On the flip side, I’m also passionate about keeping people from blowing up their financial future. I started my career when the dot-com bubble burst and I saw the pain that it created. After that, I saw countless people that went bankrupt from being way overextended with debt, much of it in the housing market. Last week’s viral incident is just one more example of people who can either get rich quickly or do the exact opposite and lose everything. When the gamification element comes into play, sometimes we forget that we are dealing with a real scenario, and one that is more complex than just buying stock in a particular company. There are many investors that don’t understand the intricacies of what’s happening with GameStop, AMC, etc. but are diving in headfirst, some with their life savings. They run the risk of doing serious long-term damage to their financial future.
My philosophy with money has always been to keep it simple. To be very clear, simple is not easy! This includes things like: ensure you have plenty of diversification in your portfolio, generally stay invested over time, take the least amount of risk possible to reach your goals, spend less than you make, control what you can (such as taxes), etc. That approach won’t resonate with everyone, but it does with most of our clients. Our goal is to help them maintain or grow their wealth over time, not instantaneously. We aren’t advising them on how to get rich through apps or speculative day trading. On the other end of the continuum, we also don’t believe hedge funds make sense for 99+% of investors and do not use them for our clients. We believe that if you follow a customized, and simple financial plan, you stand the best chance of attaining all your goals. Plus, you don’t have to ride the emotional rollercoaster that others do.
At the end of the day, there are more pros than cons when it comes to democratizing the finance industry. These recent events can be a bit worrisome, but at the very least, the media coverage has gotten more people excited about investing. My advice to anyone who is trading without significant experience is to do it with a sum of money you can afford to lose. Or do it early enough in life so if it goes poorly you have time to recover. Either way, pair your investment strategy with your financial plan. I have nothing against someone creating a “play account,” but if this is your life savings, it’s too unpredictable.
While the stories of people making millions of dollars over the last week are fun to read about, it’s not a tried-and-true method. There is no silver bullet because if trading was that easy, everyone would do it. Some will do great and they’ll shout it from the rooftops. Unfortunately, most will lose big, and will likely keep their experience quiet. While I’ll continue watching with great interest, I’ll be more focused on the strategies that stand the test of time.
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, Certified Financial Planner™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements.
Any opinions are those of Jeremy Taylor CFP ®, ChFC® and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Past performance does not guarantee future results. This is not a recommendation to purchase or sell the stocks of the companies pictured/mentioned. Options involve unique risks, tax consequences and commission charges and are not suitable for all investors. When appropriate, options should comprise a modest portion of an investor's portfolio. No statement within this document should be construed as a recommendation to buy or sell a security or to provide investment advice. Prior to making any options transactions, investors must receive a copy of the Options Disclosure Document which may be obtained from your financial advisor. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.