Suraj K. Gupta is President & CEO of Rogue Insight Capital, an investment firm focused on supporting diversity, innovation and social impact
There has been an unprecedented change in financial markets, and market access has been democratized more than ever. Investors can open accounts without minimum balances or transaction fees, and small investors are increasingly causing excessive volatility. Meme stocks over the last few years have demonstrated that deep-pocketed institutions are not the only players capable of causing drastic market movements. When enough small investors move in the same direction, the effect can be profound.
Overall, democratized market access is a good thing. Investing has only been accessible to a small percentage of the population for far too long. The more that people can invest intelligently (with emphasis on the word “intelligently”), the better off they can be.
There is a fine line, however, that separates investors from gamblers, and this line has become indistinguishable. An investor’s strategy determines if their portfolio has potential to perform well over the long term, or if they are effectively spinning a wheel in a casino.
Investing Vs. Gambling
Investing is a game where everyone can win if they play their cards right. Those who are patient, build out diversified portfolios, invest within their means and have educated themselves on the rules and on their investments can do very well. I believe as soon as investors ignore one of these aspects, they are officially gambling, and gambling is a game designed for you to lose. Investors who have too short-term a view, who do not educate themselves enough on regulations or on what they are trading or who invest more into an instrument than they can reasonably lose will not be destined for sustainable success.
As CEO of an investment firm, I have seen an incredibly high level of gambling in financial markets over the last few years. This gambling leads to increased volatility and this volatility leads to a small percentage of investors who perform incredibly well while the rest get cleaned out. Unfortunately, you are much more likely to hear about the outlier who made a killing over the thousands who lost more than they could afford. This creates a vicious cycle where gamblers hear success stories and enter the market without enough diligence, often at terrible entry points. For example, the investor in the article above bought shares in Bed Bath and Beyond (BBBY) for $5.50 and sold at $28 a few months later. Many investors heard these success stories and piled into BBBY at double-digit prices. Fast forward one year, and BBBY is trading at $1.30.
Painful Lessons
Bull markets don’t last forever. When markets turn, they bring with them pain, carnage and a dose of humility. 2022 was an absolutely brutal year for financial markets, and both investors and gamblers alike have felt the effects. Investors with long-term holding periods who structured their portfolios to be opportunistic and invested within their means will see their patience pay off. I believe this group will see interesting purchasing opportunities in the near term.
Our gambling friends, on the other hand, are likely to have learned a painful lesson. 2022 saw the demise of FTX (paywall) and a massive decline in volatile stocks and cryptocurrencies, all of which were regression to the mean. Unlike established brokerages, FTX was not appropriately managed or regulated, which paved a pathway for something devastating to take place. Many cryptocurrencies have no underlying fundamentals. The majority of meme stocks swung violently due to short-term volume from small investors and did not build any meaningful value while in the spotlight. FTX, various cryptocurrencies and meme stocks had massive traction with a corresponding brand and trading base that most people assumed was too big to fail until it was too late.
Lessons For A Sustainable Portfolio
What can we learn from all this? Firstly, whether you are investing professionally or to save money, it is incredibly difficult for even top-tier investors to beat the market consistently. Often, the best thing to do with your money is to hold a diversified portfolio (perhaps via an index-linked ETF) that you can hold for years.
Secondly, invest for the long term. Remember the age-old adage that “the market can stay irrational longer than you can stay solvent.” You may have a thesis that proves correct, but the market can take a great deal longer than you anticipate to agree with you. Additionally, if you need capital within a few years, do not put this capital at too much risk in the interim.
Thirdly, do not treat the market like a casino. While it can be tempting to make a high-risk, high-reward investment, you will have much more sustainable success with portfolio diversification. Individual positions should never be too large relative to your entire portfolio. A massive loss can take years to build original capital back, and a gamble gone wrong will put you behind the 8-ball unnecessarily. Save the jackpots for Vegas, and invest in sustainable growth that will compound over the years.
Finally, do your due diligence and ensure you truly understand what you are buying. You would not buy a car or a home without thorough inspections, and you should not invest your hard-earned capital without doing the same. A financial instrument will not perform well simply because it has performed well in the past, or because it has been in the news, or because people on Reddit believe it will. Financial instruments move based on underlying performance, and investors who truly understand this performance will win. Due diligence is a lot of work and takes a great deal of time, but the payoff in the end can be worth it.
Investing can be very rewarding and can set you up for long-term success if you do it correctly, but very little good can come from gambling with your savings. Be an investor, not a gambler.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
