Game-Stop Right There!
In the previous blog, GameStop, Blackberry, AMC: How “Dud” Companies are Suddenly Worth Billions, we discussed the origins of the GameStop and meme-stock fiasco. Now let’s take a look at some of the other players (read: enablers) and the possible outcomes of this type of trading.
As GameStop’s stock price was going vertical, so too was the social stock of popular social media platform Reddit. Much like you can scroll through Instagram, Facebook and Twitter, Reddit is organized based on users’ interests. To be more specific, Reddit is “a social news platform that allows users to discuss and vote on content that other users have submitted. To help police the site and prevent spammers from bombarding readers, Reddit came up with “karma” points. Users get karma by their comments and links being up-voted by others in the community.” (Source)
And what better way to get Karma than recommending a hot stock?
While other platforms like YouTube and Twitter had a hand in popularizing the purchase of GameStop stock, Reddit was where many traders found their information, inspiration and for many-their demise.
Robinhood
Much like John “Jack” Bogle democratized index investing in the 80s, Robinhood aims to offer individual stock trading to the masses. As with most of my financial professional colleagues, I wouldn’t call this investing; it looks and smells a lot more like gambling.
As I’ve written numerous times, true investing is boring. It involves a time horizon projected in years if not decades. Unlike so many things in life, true investing means if you’re excited about it, you’re probably doing it wrong.
When you open the Robinhood app, you see this message:
Sounds too good to be true, right? Don’t worry – it is.
While other stock brokerage apps by industry mainstays such as Fidelity or Charles Schwab make money by taking a tiny sliver from your long-term investments, Robinhood makes the bulk of its revenue off stock transactions (an industry term called PFOF). So the more often you buy and sell stocks, the more money Robinhood makes—even if you lose money with each tap. (Source)
Robinhood caters to the trader, the gambler. Someone looking for the dopamine hit, the adrenaline rush. It’s actually designed to look like a video game to cater to this specific user. That doesn’t make it bad, it’s just not investing and should be viewed more as a form of entertainment, similar to a casino.
People who are trading this way might not be aware of other issues such as…
- The taxes owed on gains.
- The risk of losing money (just as you would at the Craps table).
- The dangers of using investing apps designed to look like video games (especially for young investors).
- The risk of day trading addiction.
But What if You LIKE Trading?
If you’re someone who enjoys getting in there and doing a little day trading on your own – that’s okay. As with anything, it’s all in moderation.
For my clients looking to be more active in their portfolio management (read: stock picking), I advise them to take a portion (5-10%) of their investible assets and “have fun.” The percentage- whether closer to 5 or 10 – is determined by how diversified their holdings are (are they picking stocks or EFTs?), and their holding time frame (hours, months, or years). Most importantly, I take a look at their investment strategy (mainly if they have one) which will give me a better idea of their risk tolerance.
If you’re someone who likes to dabble in the market a little, I encourage you to talk to a fee-based financial planner (and I’m over here waving my hands saying, “Pick me! Pick me!”). That way you’ll receive an unbiased look at your finances and get expert advice on what you can risk and what you can’t.
Bottom line: Don’t make the mistake of trading real money like you’re playing Candy Crush. Otherwise you could get…well…crushed.