New Generation Of Investors Are Treating The Stock Market Like A Casino

A new generation of investors & amateur traders are rising out of the ashes of one of the most volatile and uncertain markets in history. These stock market newbies have created an entire cultural movement with an “investment strategy” that looks more like gambling than the traditional buy and hold approach of past retail investors.

It is easier than ever for the average American to invest & trade with mobile applications, zero-commissions, and even fractional shares. The barriers to investing have been knocked down. Millennials and Gen Zs have been rushing to the most accessible trading applications like the great Gold Rush of the mid-19th century, hoping to strike gold with speculative plays, on what appears to be little or no information.

Robinhood, the mobile-driven trading platform that pioneered ‘free’ trading, appears to be the preferred trading route for new investors. The name of the platform says it all. It allows the common folk to reap the same investing benefits that used to be reserved to only those in the highest income brackets.

People are starting to question whether the baseless stock and option purchases of this new generation are investments at all or is Robinhood just a casino for bored-stiff homebound youth.

Wall Street Bets

This exploding wave of investors is taking on an aggressive risk-on approach and have no shame in losing it all. A Reddit community of “Degenerates” (as they refer to themselves) called r/wallstreetbets is a discussion board where amateur investors/traders tout their massive losses just as much as their gains. These “degenerates” are gambling what sounds like all their life savings on highly risky option plays.

This “subreddit” is creating a generation of speculators, with some striking big money, but for every one winner, it seems like 10 are losing more than they can afford to. This platform is propping up shares and prides itself on the ability to “pump and dump” stocks purely from the volume of “degenerates” that follow the page (with nearly 1.3 million followers and tens of thousands online at any given moment).

Hertz (HTZ) insolvency trade is a perfect example of this phenomenon. Hertz filed chapter 11 bankruptcy at the end of May, and the stock price surged almost 1,000% off its announcement lows with small Robinhood ‘investors’ being the primary drivers. Many of these users got this stock tip from Reddit’s r/wallstreetbets.

Below is a graph illustrating the number of Robinhood users with HTZ share before and after they filed for bankruptcy (found on Reddit).

This trade made absolutely no fundamental sense from an analyst’s point of view because stockholders are the last to get paid in any sort of business liquidation. Still, this speculation worked for those who were able to get in and out on time.

They Will Learn

After the dust settles, these young gambling degenerates are going to learn. The only way we learn and grow as people is through failure. Eventually, these next-generation investors/traders will learn what works for them and what doesn’t, and this might be a much more active & flexible trading strategy than what past retail investors are used to.

We are living in an era of digitally-driven speed, and investing is no exception. We saw this over the past 4 months with the fastest market crash to recovery in the history of the stock market. This new generation of traders is only adapting to the evolving market.

Piece Of Advice

The one thing that I would say to the new retail investors is this: 

Do Your Due Diligence.

Before investing in anything, make sure you understand the trade. If you are trading for a short-term gain, make sure that the technical indicators are in line with this decision, and the fundamentals are not out of whack.

If you are looking at a longer-term investment, ensure that the business fundamentals are strong and you are not overpaying. Look for well-capitalized businesses (aka bankruptcy isn’t around the corner), with savvy management teams, product/service offerings with longevity, and a fair share price (valuation check).

Being a flexible investor is very important in this new era of trading, so getting out of an investment when the narrative changes is essential. To be successful in this era, you have to be able to accept losses and be able to sell when things turn against you.

Don’t trade on emotion or FOMO but with logic. The further you can separate your investment strategy from emotion, the more successful the tacit is apt to be.

Our current stock market environment is quite choppy, so be careful, especially at the seemingly frothy levels at which we are trading.

There is a mindset from this new generation of investors that stocks only go up, but this is not true. Shares can fall to zero (aka involuntary delisting because of insolvency), and amid highly uncertain economic times like these, those chances go up.

Patience is the key to successfully trading this market.

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