Is it just our imagination, or has there been an uptick lately in exciting new trading tactics for seizing riches from exotic new markets?
Unfortunately, as Sylvia Porter observed in her 1,200-page, best-selling Sylvia Porter’s Money Book, excitement isn’t necessarily an investor’s best friend.
What’s Old Is New Again
Who is Sylvia Porter? A 20th-century financial author and journalist, Porter challenged economic and social norms alike during her extensive career, which launched in the 1930s and peaked in the 1970s. She made her way in a male-dominated business by initially writing under the name S.F. Porter to conceal her gender. By 1975 (when her Money Book was first published), she was syndicated across 350 newspapers and the Ladies’ Home Journal.
Credited as having created the role of personal financial journalist, Porter wrote for and by the people. And yet, few remember her name. This is telling of how readily financial times, tides, and fortunes can ebb and flow.
But let’s return to the here and now and the current incubator of hot new trends. After a year spent sitting at home, an excitable generation of do-it-yourself traders has come to life. Many have replaced traditional leisure-time activities with online pursuits, including aggressive, Tweet-worthy trading for fun and profit.
With social media influencers leading the charge and the birth of new trading platforms like Robinhood, we have seen a great deal of volatility in the market thanks to these new traders. The movement roughly launched in January 2021, when a Reddit-driven rally abruptly sent the prices of several unloved stocks like GameStop through the roof.
With this, Special Purpose Acquisition Companies (SPACs) and non-fungible tokens (NFTs) are garnering attention and growing in popularity. SPACs are simply shell corporations established to acquire a private company. These SPACs make the private company public and bypass the normal process of public offerings.
An NFT is similar to a collectible ― an autographed baseball card, for example ― but in digital format. Similar to playing cards, people are collecting these pieces of code, typically exchanging them in cryptocurrency such as bitcoin.
How much is an NFT actually worth? However much the market decides. Some are currently trading in excess of $1 million each. As the Hustle article describes, NFTs “have caught the attention of tech investors (Mark Cuban), the high-brow art world (Christie’s auction house), and major corporations (Nike) alike. And everyone from Lindsey Lohan to the rock band Kings of Leon is flooding the market with high-priced virtual creations of their own.”
Innovations vs. Investments
These and similar get-rich-quick possibilities may seem shiny and new. And some of the underlying infrastructure truly is groundbreaking. Like the Internet, electricity, and the wheel, intriguing innovations like blockchains, cryptocurrency, and NFTs may lead to incredible applications we can’t even imagine at this time.
Plus, at least on paper, some have amassed rapid fortunes by being in the right place at the right time. Trading into the innovations, they’ve caught a wave of risk-laden opportunity, and some have gotten very rich in return. Much of the action is highly reminiscent of the 1990s tech bubble when a trade at nearly any price into almost any company with a high-tech name seemed sure to pay off handsomely… right up until most of them no longer did.
Time will tell whether these brave speculators manage to convert their good fortune into lasting wealth once today’s trends fizzle.
In his book, The Psychology of Money, Morgan Housel describes two types of market participants — short-term traders and long-term investors ― and why it’s essential to know which one you are:
“Short-term traders operate in an area where the rules governing long-term investing, particularly around valuation, are ignored because they’re irrelevant to the game being played. Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.”
97-year-old billionaire Charlie Munger (Warren Buffett’s long-time Berkshire Hathaway partner) is even more blunt about the differences between short-term speculators versus long-range investors. Some “may call it investing,” he said in a recent interview, “but that’s all bulls**t. It’s really just wild speculation, like casino gambling or racetrack betting.”
In yet another powerful piece, “Financial Implications of Robinhood Investors,” financial author Larry Swedroe took a look at a recent academic study that analyzed the new breed of stock market participants using Robinhood’s no minimum, zero-commission trading platform. The study found that Robinhood participants tend to be younger, less wealthy, and hungry for more frequent, higher-volatility trades. In aggregate, “zero-commission investors behave as noise traders,” with a market impact similar to past noise trading and inventory risk models.
Thriving in the Unknown
In other words, hot trends are business as usual in the financial world. Fortunes will rapidly rise and fall just as suddenly. A few will strike it rich. Far more will be left licking their wounds - if they’re lucky.
That’s a dicey way to pursue your long-term financial goals. You may be seeking to harvest returns from the same market, but your end goal is entirely different from those of noise traders. Remember these differences if you ever feel left out of all the excitement.
As 16th century Renaissance mathematician and gambler Gerolamo Cardano reportedly once said: “The greatest advantage in gambling lies in not playing at all.”
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