The Journey from Greed to Fear

Every generation must learn its own lesson about speculative trading. Millennials and Gen Z are in the early stages of their speculation education due to the popularity of the Robinhood trading app and similar free stock trading platforms.

Free trading on your phone is only the latest way to play the age-old game of fear and greed. The investment of choice and the trading tools have evolved, but the pattern of behaviors stay the same. The most recent speculative booms include the 2017 cryptocurrency bubble, the 2011 gold peak, and the original online trading craze during the late ’90s tech bubble. I will never forget playing video games at a friend’s house in high school in 2000 when we were interrupted by his dad walking in from his office with an ecstatic expression on his face. He exclaimed, “I just made $15,000 on a trade!”

Robinhood came on the scene in 2013 and has surged in popularity over the last year. The app went from one million users in 2016 to 10 million by the end of 2019. User growth continued in 2020. Stock picking took the place of sports gambling as college and professional sports shut down due to COVID 19. Millions of Americans stuck at home during quarantine occupied themselves with trading, often piling into trades for struggling sectors, including airlines, cruise lines, and car rentals. The behaviors that we see from Robinhood account holders fit all the traditional marks of speculative trading, including the overconfidence that comes with every generation’s trading bubble. Robinhood trades are notorious for bragging about their gains and poking fun at traditional asset managers. I have seen more than a few Twitter posts from inexperienced millennial traders “talking smack” to legendary hedge fund and portfolio managers.

The euphoria of these speculative trading booms usually results in asset prices rising beyond reasonable levels before crashing down rapidly. The investors who participate risk losing all of their gains, if not most of their principal, by continually raising the stakes as their confidence grows. I have met investors who are still hesitant to buy stocks 20 years after the tech bubble. The pain is still fresh in their memory.

By looking at history, we can see that this is not likely to end well. Which raises the question…should we be preventing this sort of behavior? Some people advocate for greater financial literacy as a way to prevent potentially harmful speculation. While I am an advocate for financial education, I believe this is one lesson that can only be learned by experience. A textbook cannot describe the euphoria someone gets from doubling their money on a short-term trade. Even the best economics professor cannot convey the fear, shame, and regret that accompanies a significant stock loss. Each investor must experience the journey from greed to fear on their own. As an advisor, I can only hope that they are betting only what they can afford to lose.

 


The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct Investing involves risk and you may incur a profit or loss regardless of strategy selected. Individual investor’s results will vary. Past performance does not guarantee future results.

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