This article was first published in the National Post on July 31, 2021. It is being republished with permission.
by Tom Bradley
There has been a lot of cheerleading about do-it-yourself investing. People are opening discount brokerage accounts in record numbers and young investors are flooding into the market.
I can’t help but think we’re building an ecosystem for failure. The excitement isn’t about investing. It’s about gambling and speculation. About riding a one-way market that’s being fuelled by low interest rates and a complacency to risk.
Parts of the investment industry are turning their back on long-standing investing principles like compounding, diversification and the importance of valuation, and traits like discipline and patience.
To explain what I mean, let’s take a tour of the ecosystem, starting with discount brokers.
These firms are fighting for market share and their promotions are all about trading: low commissions, no commissions, 300 free trades a year and easy-to-trade apps. The visuals in the ads are powerful. A person who oozes success is looking at a screen with colourful charts and lots of numbers. Even I feel like I’m missing out on some really cool stuff, and I do this for a living.
The trading culture starts innocently enough. In most parts of Canada, school kids are required to play a stock market game that lasts only a few months and rewards a “go for it” approach. They can’t help but come out of it thinking that’s what investing is about.
Building on the school game, brokers are trying to “gamify” their offerings. Robinhood, a U.S. broker, has been leading the charge. The goal is to create volume by making trading easy and more fun than TikTok. Indeed, day trading was a common substitute for sports betting during the early COVID lockdowns.
Too much of a good thing
The emergence of ETFs has brought the cost of investing down and made it possible to build well-diversified portfolios with just a few funds. But the industry doesn’t know when to stop.
There are more than 1,000 ETFs to choose from in Canada. There’s a fund for any mood you’re in. The initial emphasis on broad market exposure at a low cost has shifted to sector rotation (hard to get right), market timing (impossible to get right) and, yes, trading.
John Bogle, the father of indexing and founder of Vanguard once said: “As the splinters get thinner they grow sharper, and the odds of folks hurting themselves with these pointed objects now approach 100%.”
No price tag
When someone tells me that I need to buy Bitcoin or Ethereum, I ask one question: What do you think it’s worth? I never get an answer. Cryptocurrencies and meme stocks appear to be untethered by valuation, the best predictor of future returns.
In addition to a lack of valuation awareness, some investors are on a mission. I don’t mean mission-based in the social or environmental sense, but rather the “stick it to the man” or “my parents don’t get it” sense. I don’t know about the parents, but it’s a tough road to retirement to bet against hedge fund managers who have an acute sense of value.
What’s your edge?
Today, investors have a cheering section rooting them on. Business news, apps and research websites like Motley Fool, and promoters on Reddit are telling you how to find the next Amazon and where the action is. Unfortunately, they’re selling the same edge to millions of others.
The capital markets are ruthless at balancing reward and risk. Something that has potential to double can just as easily halve. The more return an investment offers, the more risk it has. People are looking for antidotes to these inconvenient truths.
Stock options are one such alternative that reveal the health of the ecosystem. Option volumes have exploded for the same reason lottery tickets are popular — a small investment can pay off big. But there are no silver bullets in the options market. It’s dominated by professional traders and is highly efficient.
There has never been a better time to be an individual investor. Low costs, product variety and access to information have levelled the playing field. The trick is to not let the industry — or the herd — manage your portfolio. You need to be self aware — what are my goals and what does risk mean to me? — and have a bit of a contrarian streak.
Investing is a solitary pursuit, not a social activity or entertainment.
We're not a bank.
Which means we don't have to communicate like one (phew!). Sign up for our blog to get the straight goods on investing.