When you’ve lived a few years, you come to appreciate the truth of statements like:
“The house always wins.”
“In a gold rush, the only one guaranteed to get rich is the guy selling the shovels.”
And . . .
“Any ‘exclusive’ investment advertised as a ‘sure thing’ probably isn’t either one.”
If you were around for the Internet stock craze of the late 1990s or the real estate bubble of the late 2000s, you know it can be extremely tempting to jump into an investment that has a recent track record of skyrocketing to higher and higher values.
But in any market driven by emotion (especially the feeling that you could be missing out on the “next big thing”), there comes a day of reckoning. Values eventually seem to adjust back down to reality and some people lose a lot of money, especially those who were late to the game.
It’s the perfect combination to lure in younger investors who haven’t experienced the harsh realities of markets yet — many were watching Sesame Street the last time this kind of bubble collapsed.
Sara Grillo, a former finance professor and now an advisor, has been warning that this type of speculation will harm a lot of younger investors. And that the tactics used to promote it are likely illegal.
Grillo explains, “The pandemic closed casino doors and opened sesame to a much more addictive and accessible form of gambling: online day trading. It is the new drug of choice for Generations Y and Z.”1(Demographically, people under 35 years of age.)
She calls this form of trading “pop finance” because a single post from a social media influencer can cause the value of a stock to spike as a crowd of followers are prompted to buy.
“Just like a drug,” she says, “excitement over these faux celebrities distorts people’s view of reality.”
But what Grillo finds equally egregious is the way that “affiliate marketers” (who receive a commission on internet sales) are making money by convincing people to buy these investments.
Citing several online videos as examples, she says that without a securities license, they are encouraging people to open accounts at a specific brokerage to make the trades discussed in the videos and getting a kickback from it.
Gallo notes that this is highly unethical and probably illegal.
The younger people you know may not be participating in this gamification of stocks.
But if you have the chance to discuss investing with your adult children (or nieces and nephews, etc.) it would be good to find out what they think about the Reddit/Robinhood trends.
This will give you the opportunity to share your own experience with get-rich-quick schemes that all too often seem to leave the majority of investors holding the bag.