Amateur Year
RJ Steinhoff, CFA Investment Process
Lured by huge gains and perhaps bored while stuck at home, millions of young people have flocked to day-trading apps to speculate in stocks and cryptocurrencies. These apps have seen user growth surge during the pandemic. Robinhood’s assets under custody alone stand at $80 billion and users surged 150% in the year ended March 2021.
With limited experience or investing knowledge, these bedroom-traders have plunged head-first into equity, cryptocurrency and options trading. Forget amateur hour–the post-pandemic boon that has now lasted just more than twelve months has been defined by these amateurs. Buoyed by their gains, some of these amateurs have become self-styled market prophets. From athletes and actors to meme-loving Elon Musk, it seems anyone is at the ready to offer advice and prognostications (of course with the disclaimer it’s “not financial advice”). High-profile influencers regularly team up with fledgling cryptocurrencies to hawk coins to their millions of followers. Stocks like AMC and Gamestop are celebrated, with every dip an opportunity to buy more.
As these overnight gurus celebrate their success, another group of traders revel in their losses. In places like Reddit’s infamous WallStreetBets subreddit, “loss porn” is shared with fellow users. Posts there gleefully celebrate six- or even seven-figure losses. Unlike past booms, this crop of traders at least appears to have a healthy amount of self-awareness. They routinely make fun of themselves, proudly basking in their own lack of investment acumen. A recent poster declared, “I can’t wait to become a millionaire” on top of screenshot of their $20,000 loss.
Both groups of traders are likely destined for failure. The mountain of evidence from practitioner and academic studies going back decades concludes that day trading is a money-losing proposition. The small fraction of traders that make money at any given time, around 10%, indistinguishable from luck, serves as a beacon of possibility for the money-losing majority.
Online brokers are only too happy to service (read: enable) these gamblers, encouraging bold bets through slick social media ads. The self-stated goal of these online brokers is to “democratize” investing. Apparently, democratization means providing a platform for rampant speculation while the brokers offer zero commissions, though at hefty spreads, while reaping interest income and fees from selling order-flow data to Wall Street’s biggest firms.
Investing success stems from discipline. Over time, buying a broad basket of low-cost ETFs has shown to work. Buying stocks with factors such as quality, value, and momentum works. However, these approaches are not glamourous and it’s certainly difficult to fashion marketing campaigns around them. Building wealth over the long-run doesn’t make for good Instagram stories. Compelling content for the feed will not be found by doing nothing except regular account rebalancing.
Today’s amateur investors are akin to non-professional gamblers (yes there are pros) at the racetrack, merely wagering on the colour, name, or popularity of the horse. Sure, big wins can be had, but in the long-run paying keen attention to the odds, knowing when to wager or not and how much, while sticking with a repeatable process, is key to success. Investing is not gambling. It’s the act of buying great businesses at reasonable valuations. Positions are sold when the outlook changes, valuations are too rich, or better opportunities are presented. This is the exact opposite of what today’s speculators appear to be practicing.
DISCLAIMER
The information contained herein is for informational and reference purposes only and shall not be construed to constitute any form of investment advice. Nothing contained herein shall constitute an offer, solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. Investment accounts and funds managed by Generation PMCA Corp. may or may not continue to hold any of the securities mentioned. Generation PMCA Corp., its affiliates and/or their respective officers, directors, employees or shareholders may from time to time acquire, hold or sell securities mentioned.
The information contained herein may change at any time and we have no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed in this presentation. It should not be assumed that any of the securities transactions or holdings mentioned were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities mentioned. Past performance is no guarantee of future results and future returns are not guaranteed.
The information contained herein does not take into consideration the investment objectives, financial situation or specific needs of any particular person. Generation PMCA Corp. has not taken any steps to ensure that any securities or investment strategies mentioned are suitable for any particular investor. The information contained herein must not be used, or relied upon, for the purposes of any investment decisions, in substitution for the exercise of independent judgment. The information contained herein has been drawn from sources which we believe to be reliable; however, its accuracy or completeness is not guaranteed. We make no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained herein. We expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained herein.
All products and services provided by Generation PMCA Corp. are subject to the respective agreements and applicable terms governing their use. The investment products and services referred to herein are only available to investors in certain jurisdictions where they may be legally offered and to certain investors who are qualified according to the laws of the applicable jurisdiction. Nothing herein shall constitute an offer or solicitation to anyone in any jurisdiction where such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such a solicitation.
Lured by huge gains and perhaps bored while stuck at home, millions of young people have flocked to day-trading apps to speculate in stocks and cryptocurrencies. These apps have seen user growth surge during the pandemic. Robinhood’s assets under custody alone stand at $80 billion and users surged 150% in the year ended March 2021.
With limited experience or investing knowledge, these bedroom-traders have plunged head-first into equity, cryptocurrency and options trading. Forget amateur hour–the post-pandemic boon that has now lasted just more than twelve months has been defined by these amateurs. Buoyed by their gains, some of these amateurs have become self-styled market prophets. From athletes and actors to meme-loving Elon Musk, it seems anyone is at the ready to offer advice and prognostications (of course with the disclaimer it’s “not financial advice”). High-profile influencers regularly team up with fledgling cryptocurrencies to hawk coins to their millions of followers. Stocks like AMC and Gamestop are celebrated, with every dip an opportunity to buy more.
As these overnight gurus celebrate their success, another group of traders revel in their losses. In places like Reddit’s infamous WallStreetBets subreddit, “loss porn” is shared with fellow users. Posts there gleefully celebrate six- or even seven-figure losses. Unlike past booms, this crop of traders at least appears to have a healthy amount of self-awareness. They routinely make fun of themselves, proudly basking in their own lack of investment acumen. A recent poster declared, “I can’t wait to become a millionaire” on top of screenshot of their $20,000 loss.
Both groups of traders are likely destined for failure. The mountain of evidence from practitioner and academic studies going back decades concludes that day trading is a money-losing proposition. The small fraction of traders that make money at any given time, around 10%, indistinguishable from luck, serves as a beacon of possibility for the money-losing majority.
Online brokers are only too happy to service (read: enable) these gamblers, encouraging bold bets through slick social media ads. The self-stated goal of these online brokers is to “democratize” investing. Apparently, democratization means providing a platform for rampant speculation while the brokers offer zero commissions, though at hefty spreads, while reaping interest income and fees from selling order-flow data to Wall Street’s biggest firms.
Investing success stems from discipline. Over time, buying a broad basket of low-cost ETFs has shown to work. Buying stocks with factors such as quality, value, and momentum works. However, these approaches are not glamourous and it’s certainly difficult to fashion marketing campaigns around them. Building wealth over the long-run doesn’t make for good Instagram stories. Compelling content for the feed will not be found by doing nothing except regular account rebalancing.
Today’s amateur investors are akin to non-professional gamblers (yes there are pros) at the racetrack, merely wagering on the colour, name, or popularity of the horse. Sure, big wins can be had, but in the long-run paying keen attention to the odds, knowing when to wager or not and how much, while sticking with a repeatable process, is key to success. Investing is not gambling. It’s the act of buying great businesses at reasonable valuations. Positions are sold when the outlook changes, valuations are too rich, or better opportunities are presented. This is the exact opposite of what today’s speculators appear to be practicing.
DISCLAIMER
The information contained herein is for informational and reference purposes only and shall not be construed to constitute any form of investment advice. Nothing contained herein shall constitute an offer, solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. Investment accounts and funds managed by Generation PMCA Corp. may or may not continue to hold any of the securities mentioned. Generation PMCA Corp., its affiliates and/or their respective officers, directors, employees or shareholders may from time to time acquire, hold or sell securities mentioned.
The information contained herein may change at any time and we have no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed in this presentation. It should not be assumed that any of the securities transactions or holdings mentioned were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities mentioned. Past performance is no guarantee of future results and future returns are not guaranteed.
The information contained herein does not take into consideration the investment objectives, financial situation or specific needs of any particular person. Generation PMCA Corp. has not taken any steps to ensure that any securities or investment strategies mentioned are suitable for any particular investor. The information contained herein must not be used, or relied upon, for the purposes of any investment decisions, in substitution for the exercise of independent judgment. The information contained herein has been drawn from sources which we believe to be reliable; however, its accuracy or completeness is not guaranteed. We make no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained herein. We expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained herein.
All products and services provided by Generation PMCA Corp. are subject to the respective agreements and applicable terms governing their use. The investment products and services referred to herein are only available to investors in certain jurisdictions where they may be legally offered and to certain investors who are qualified according to the laws of the applicable jurisdiction. Nothing herein shall constitute an offer or solicitation to anyone in any jurisdiction where such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such a solicitation.
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