Bored from mandatory lockdowns and social distancing, Mr. Novice Investor – armed with stimulus money – decides to give the stock market a whirl. The money is free, and heck, even the trading is free on Robinhood. Free money and free trading, what does he have to lose?
That was the thinking of millions of Americans in 2020 as they dove headfirst into Wall Street for the first time.
These millions of novice investors fit a general profile:
- They have a risk appetite.
- They are heavily influenced by social media, sound bites, and internet buzz (i.e., Reddit) in their investment decisions.
- They lack the confidence to make investment choices on their own.
There’s a reason the millions of Americans that tried stock and crypto trading for the first time in 2020 never tried it before. They lacked confidence. But with free money and free trading and a nothing to lose attitude, many were willing to give it a try, but many were insecure investors at their cores.
How did they compensate for their insecurities?
The group was manipulated and influenced by the crowd and influenced by Reddit chat rooms, social media, and Elon Musk.
Unable to make decisions independently, these novice investors are always in desperation mode – desperate for that next meme, post, or soundbite that will dictate their investing choices. They’ll cling to the latest social media or Reddit-influenced stock (meme stock) because everyone else will do it, and they’ll be able to enjoy at least a short-term ride. That’s why they’ll scan social media, Reddit, and Elon Musk’s Twitter feed for their next trading move.
Meme stocks and crypto – that’s what these newbie investors are drawn to. They’ll hang on Elon Musk’s every word for his latest endorsement of the next crap coin – unaware that Musk is playing them like a puppet and making billions in the background by fueling a crypto craze.
How ridiculous is the crypto craze?
Musk was once a big supporter of Dogecoin. Really? Dogecoin was a cryptocurrency started as a joke and is widely accepted NOWHERE, but the only one laughing is Musk – all the way to the bank. With a single tweet or quote, he can move the price of any cryptocurrency by 30, 40, 50%.
Nobody sees themselves getting played? Musk doesn’t even need the money. It looks like he’s just having fun at the expense of his loyal sycophants.
Like VR, crypto may have a future, but it has failed to serve any practical function. But with guys like Musk who give it a smidge of legitimacy, crypto will always be at the forefront of investors’ minds.
What’s driving the craze for meme stocks and crypto? SPECULATION.
Investors driving the trend aren’t investing. They’re gambling. The internet and social media have conditioned them to chase gains – capital gains – the spread between the purchase and sell price.
So what happens when the market crashes and everyone retreats – including those once-powerful social media influencers and talking heads? These millions of investors will have nobody to follow and will flounder because they cannot make choices on their own.
Successful investors lead and don’t follow. They forge their paths and can make their own investment decisions. How are they able to avoid the traps everyone else falls into?
Here’s how to avoid ever falling into desperation mode when investing:
- Eliminate media from your investment decisions. Stop watching the news and reading investment group posts, and tweets. Ignore the noise by ignoring the crowd of speculators. Listen to other successful investors who have built wealth over time and not overnight.
- Don’t speculate. Act like an investor, not a gambler. Set financial goals and tailor an investment strategy and path for achieving those goals.
- Think long-term. Invest in long-term trends, stability, income, and reliable growth. Avoid flashes in the pan. Look for underlying value and demand – resistant to downturns and inflation. Seek out illiquid assets with lockup periods of at least 3-7 years – insulated from herd mentality.
- Seek out private market alternatives. Avoid public markets that have proven time and again to be highly susceptible to manipulation in the last year. Private market opportunities are immune to manipulation because they’re illiquid. Even if investors panic, private market alternatives save investors from themselves by preventing the resale of their interests.
- Invest in passive funds and investments with defined exits. Investments with defined exits typically have defined and well-articulated business plans. It is also a sign of management competence and expertise.
- Invest in real assets. Assets with intrinsic value – value from serving a purpose such as providing housing or meeting a consumer need – naturally appreciate over time and not wild speculation. Intrinsic value is independent of what investors are willing to pay for it. With intrinsic value, investors have the comfort of knowing that no matter what the rest of the investing public thinks, the asset will always serve a purpose and always provide value to its investors. The same cannot be said about meme stocks or cryptocurrency – assets devoid of intrinsic value.
- Invest in yourself. Learn to be secure in your decisions by building up your knowledge. Seek out books, online resources, and other investors to build your proficiency in analyzing deals.
Investors who have successfully invested long-term have had one thing in common: they have all broken away from the crowd. They never do what everyone else is doing because what everyone else is doing is following false prophets.
Successful investors are never desperate to follow anyone or anything. They are confident in their investment decisions.
But don’t assume that this confidence was gained overnight. Instead of seeking out the Elon Musks of the world, they sought knowledge and adopted the proper habits to arrive at the summit. And the lesson for everyone else is that anyone can achieve. You have to start by ignoring the noise.