There is lots of interest in the stock market and investing at the moment. In fact, I don’t think it has been greater in my 20 or so years in the industry, which is significant as I started out in 1999 during the infamous dotcom boom.
At that time there was a boom in ‘day trading’, with people clamouring to own the next hot stock and sell it on for a quick profit. Today’s excitable Reddit threads are reminiscent of the ‘chat rooms’ back then but on a bigger scale. In the late 1990s, regular access to the internet and to the stock market was for the few not the many. Today, virtually everyone has access to a device that connects them with others around the globe with the same interests and simultaneously allows them to trade a wide range of investments.
In some ways it makes a refreshing change. It’s good that people are engaging with their finances. For much of the past two decades this has been sadly lacking across large sections of society. It’s uncomfortable, though, that the surge in interest comes at a time when global markets are at record highs thanks to low interest rates, strong earnings in the technology sector and epic central bank and government stimulus. It makes the need to tread carefully more important.
More worrying is the increasing tendency to speculate rather than invest. Needless to say the exhuberance of the late 1990s didn’t end well for lots of people as the fortunes of internet companies, some possessing little more than a domain name, foundered. Fortunes were made and lost, often the latter, and I fear there may be a similar story brewing this time around.
That already seems to be the case for lots of small investors in GameStop, the struggling US videogame store chain. The company found itself the subject of a tussle between short selling hedge funds (who hoped to gain from a fall in value) and a band of clever private investors who had spotted that the number of shares shorted was actually greater than the number that existed. It was folly on the part of the hedge funds involved for sure. They racked up huge losses as shares rose many fold in a ‘short squeeze’, but many amateur investors were burnt too as they bought in at the height of the frenzy at prices that defied any rational assessment of value. It’s a reminder that markets have no mercy on those prepared to invest without regard for valuation.
Cryptocurrencies such as Bitcoin are also very popular right now. There’s lots of reasons to think that the technologies behind them such as blockchain are revolutionary and a great growth story, but the risk involved in the individual coins and tokens is exceptionally high and in lots of cases poorly understood. They could continue to rise as more people back their adoption, but ultimately they could become worthless. They are also completely unregulated and if assets are stolen or lost there is nothing that can be done. The Financial Conduct Authority (FCA) warns that consumers should be willing to lose all their money when investing in the space.
With the proliferation of social media and enforced boredom of lockdowns, it is perhaps inevitable people are looking to inject some excitement into their lives during a difficult and sometimes harrowing time. Speculating in shares, cryptocurrencies or commodities might seem alluring and fun, but it’s a form of gambling rather than investing. Rapid gains can quickly turn to losses, which might be fine for those who can afford to lose their money but certainly isn’t for those who can’t.
In contrast, investing is a measured and long-term process. It still involves taking risk but doing so in a way that minimises and mitigates it in order to more reliably harness the growth available across global economies and individual companies. The most important factor in investing is time, which is why anything less than five years is considered too short a period. Stock markets sometimes endure downturns lasting several years. Diversification, spreading your money across lots of different investments, is also sensible to avoid reliance on one or a small number of shares or assets, or one sector or geographical area.
Keeping these principles in mind can make investing a lot more dependable. For the speculators they will seem dull, but that’s the point. Investing done well shouldn’t send pulses racing.
Many people’s first experiences of stock markets are speculative before they come to understand that longer term investing tends to win out – a case of tortoise and hare. In other cases, though, people are permanently put off when ill-advised bets go wrong and they come away thinking they have been to a casino and lost. Sadly, that’s why some people miss out on the longer term benefits of building wealth slowly but surely. It’s important not to let the line between speculation and investing become blurred.
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