The case against investing your money, sort of…
So your most recent government stimulus check just hit your bank account. Why not consider buying some stocks and making your newfound wealth work for you? There’s a low cost of entry, massive upside potential, growing popularity, and improved accessibility to trading platforms. Who wouldn’t want to get in on that, right? That’s what the folks at r/wallstreetbets would have you thinking, at least.
The draw of this community is undeniable, whether to actively partake in the mayhem or to just poke around, as I do. WSB could easily be characterized as the antithesis of traditional stock market participation and discussion. The community consists of 10.2 million self-proclaimed “degenerates” and “autists” (defined by Wikipedia as “Internet slang, offensive, derogatory, often self-deprecating”). Common contributions include memes, aggressive (and rarely justified or explained) investing advice, tweets, and related news… in that order of frequency. The following are top posts within the r/wallstreetbets subreddit, all from the past year.
A period of time that epitomizes the culture and happenings of WSB is the Gamestop/AMC/Blackberry period. This is also the time when the community rose to fame and gained the attention of the masses. They were all Twitter, Facebook, and even traditional news outlets could talk about. This period was also characterized by rapid growth in the number of users, dramatically increased levels of activity and engagement among users, intense pressure within the community to buy and hold key stocks, and heavy news coverage. There were also lots of discussions surrounding group strategy and plans for the future, especially in light of new developments, such as potential class-action lawsuits against Robinhood.
The lawsuits against Robinhood are an excellent example of this community’s remarkable ability to make decisions and take action collectively. You’d think it would be nearly impossible to coordinate a group of 10.2 million people, all with vastly different backgrounds and perspectives, to act in coordination with one another. Though ultimately unsuccessful in court, scoured GME owners (or want-to-be owners) launched more than a dozen class-action lawsuits against Robinhood for having “ breached its contractual obligation as a regulated broker to execute orders promptly and effectively” (Reuters).
So, who is the primary user of an investing platform like Robinhood, and how do they differ from the traditional investor? For starters, they invest significantly less than the users of more traditional and well-established trading platforms, such as TD Ameritrade or Schwab. In January of 2021, the typical Robinhood user had an average monthly account balance of $7,649.90. In contrast, Schwab and TD Ameritrade users had average monthly account balances of $13,918.89 and $14,718.80, respectively.
Another important metric by which these users differ is their average FICO credit scores. 42.65% of Robinhood users had a credit score below 650, 41.74% had a credit score between 650–750, and only 15.61% had a credit score above 750. In contrast, 33.33% of Schwab users had a credit score below 650, and 21.17% had a credit score above 750.
While a low credit score doesn’t automatically indicate poor financial decision-making and irresponsible habits, it does provide insight into a person’s relationship with debt. Whether it be student loans or just a high credit card balance, a low credit score is often an indicator of large amounts of outstanding debt, and/or a poor history of making payments on time, if at all.
Why these stark differences? For starters, Robinhood has been extremely successful in its product differentiation and branding. They have effectively portrayed themselves as an online stock trading platform for the average person, a non-expert who is hoping to join in on the fun and make some money. The platform is designed to be accessible and easy to navigate. They can also attribute some of their success to the commission-free trading they provide their users. For these reasons, Robinhood was an attractive way to get into the stock market, especially for newer and less experienced investors.
Another interesting trend in Robinhood users, especially those who primarily traded GME, was significant amounts of outstanding debt. Many investors purchased shares of GME in hopes of paying down credit card debt, educational loans, or other debt.
Was this a wise decision? That depends. On one hand, there was massive upside potential and, with enough growth in stock values, you could pay off your loans in their entirety with just a portion of what was owed initially. On 1/27/2021, GME closed at $347.51. The percentage change was 1,744.53%. With limited prior knowledge and understanding of the stock market, in combination with a bit too much time spent scrolling Reddit and Twitter, it would be easy to believe that the stock was only going to keep going up. Confidence was further bolstered by encouraging tweets and endorsements from high-profile investors such as Elon Musk and Mark Cuban.
While a 1,744.53% return sounds great, there is also a chance that you would have been better off just putting the cash you spent on stocks towards your loans directly. Say you have a $5,000 in credit card debt with a 16% annual interest rate (the national average for credit card APRs). Even if you only have $200 in cash, paying off just a portion of your credit card debt would result in an immediate 16% return on that $200 “investment”. If GME or your overall portfolio does not produce a return of 16% or higher, you would have been better off just putting that cash towards paying off a portion of your loans.
My concern is that in pursuit of greater returns, many retail investors will find themselves instead suffering from larger losses. Unlike the massive financial institutions and hedge funds that trade alongside them, the vast majority of individual investors — especially those who trade on platforms such as Robinhood — will not have billions or millions to fall back on.
When you go to the casino they always say “don’t gamble with money you can’t afford to lose”. I think this could also apply to investing, to a certain extent. I suppose an improved and more accurate title to this article would be: The case against investing all your money in just a few stocks because a stranger on the internet told you to.
I believe it is important to draw a distinction between the highly popular and hugely volatile stocks being pushed by Redditors, such as GME, BB, AMC, and their less glamorous, though more stable counterparts, such as blue-chip stocks and ETFs. This is yet another way “old-school” investors are different from new market participants and retail traders.
So after all that, maybe you’re a bit intimidated by or weary of WSB. That is understandable. What then? If you like the open-forum nature and comedic content of WSB, but seek a bit more reliability and accuracy of information, r/investing is a good alternative for you. Still slightly satirical and humorous (it is Reddit, after all), this community is more informative in nature. It has significantly fewer memes, emojis, and expletives. Common posts include recaps of major market events, sharing and analysis of financial research and news, as well as advice and discussion with fellow community members. They also provide users with information on how to get started in the stock market, comparisons of different brokers, guides to stock researching, podcasts, websites, and books. Overall, its members tend to take a less risk-aggressive approach to investing, in comparison to their counterparts at WSB. Think of it this way; if r/wallstreetbets were New Hampshire (lawless, unpredictable, and chaotic), then r/investing would be Massachusetts (older, highly educated, and at times a bit condescending).
If you’re looking for something even more serious, however, I suggest taking advantage of the resources provided by asset management firms like Vanguard, Fidelity, and others. You do not have to have investments with them to access this information. Because they have an abundance of resources and it is in their best interest for their investors to be well-informed, the information they provide is extremely high-quality and reliable.
TLDR: random Northeastern undergraduate student explains why the stock market is good for building wealth over a long period of time, but dangerous when gamified and decisions are made hastily and without due diligence.
