Lessons Learned from a Highly Speculative Stock Market
July 24, 2020
If the last few months of price movement in the stock market has shown us anything, it’s that most retail investors have no idea where the next big surge in buying and selling will be. Whether it is Tesla increasing from $361 (its March low) to $1400 (its current high) in a matter of months, or the Nasdaq hitting all-time highs in the middle of a pandemic, timing the market is one of the most difficult things an investor can try to do.
The huge swings up or down can be enticing—even intoxicating—for the new investor. Promises of fast money on exaggerated market moves have given way to a new trend of reckless investing, especially amongst younger investors.
However, one thing I believe is important to emphasize, is that this is not investing, it is trading (some may even call it gambling). While I hesitate to say that money cannot be made here in the short run, trying to time short-term market moves can easily lead to bankrupting your account. This is why I always suggest investing for the long term, diversifying your portfolio, and banking on trends that will last.
The Age of Robinhood
The popular investing app Robinhood has opened the doors to a new generation of traders through its sleek and simple platform. With these newly reduced barriers to investing, many have entered the stock market when they otherwise may not have. However, the trends I have seen emerge are troublesome and worrying.
One of the most popular features available to Robinhood investors is stock options—known more simply as options. Put very simply, options are essentially hyper-leveraged contracts that see magnified returns based on small price movement. With these, it is possible to make extremely risky trades that could see a return of 100 percent or more in a matter of minutes, days, or hours. Yet, for the inexperienced investor, this often means a quick and relentless loss.
Robinhood is all about quick and easy. It incentivizes users to cash out and leave the market just as quickly as they entered it. While a good tool for acquainting aspiring traders with the idiosyncrasies of investment, I maintain that investors should look for long-term ventures that disrupt markets, cater to the needs of young people, and will remain viable for decades.
At the end of May, rental car company Hertz declared bankruptcy. Under normal circumstances, a company’s bankruptcy would cause the stock to plummet and never look back. However, on June 4th, the Hertz’ share price soared an inexplicable 900 percent. This incredible move indicates that the allure of penny stock investing has now made its way to the mainstream.
Many observers cited the correlation between the number of Robinhood accounts holding Hertz stock and the meteoric rise of its share price. When investors back bankrupt companies with cheap shares, euphoria and myopia prevail over diligence and foresight. It doesn’t take a Harvard MBA to see that a moribund firm just simply won’t be viable in ten or fifteen years.
Another testament to the current investment paradigm we’re seeing is Nikola (NKLA), a carmaker marked—and cleverly named—as a competitor to Tesla. Equipped with hydrogen fuel-cell technology, many investors saw Nikola as the future of the low-emission auto industry.
But Nikola’s fall came just as abruptly as its rise. After peaking at just a shade under $100 per share, Nikola stock price currently sits at just $40 in change. For aspiring investors, Nikola is an excellent case study of the dangers of jumping onto short-run investment bandwagons.
Investment is a tricky business. While penny stocks and have been glorified in movies like The Wolf of Wall Street, a long-term investment strategy built around disruptive firms and services will yield greater returns in the long-run.
I urge aspiring investors to see investments differently. Look for innovative ventures that fill voids in consumption created by younger generations or that provide a novel service within an already established market. Look for the ventures that deliver life-changing new technologies to people desperate for innovation. Look for ways to generate returns while changing the world for the better—that’s where the real satisfaction is made.