The stock market is what it is: a place where you can invest long term for your future or a place where you can place short term bets that more closely mirror gambling. Apparently this last November saw a significant amount of young and inexperienced investors get greedy and do the latter.
Now I must say upfront that there are people who can and do make money trading short term. But most fail at that strategy and those few that do well have most likely put in a lot of time and effort to learn what works and doesn’t work. I think its safe to say that it is almost impossible for a beginner investor to start trading stocks and be profitable, at least over any length of time.
The US Election Brought Out The Greed
For months leading up to November’s election, the word on the street was that Wall Street wanted Clinton to win and Trump to lose. Clinton would mean business as usual and Trump would be a total wild card and the market hates uncertainty which is what he would certainly bring. It was predicted virtually everywhere that a surprise Trump victory would sink the stock market. If such an unthinkable thing were to happen, stocks would tank and tank big time.
According to Bloomberg, a lot of young investors bought into this theory and in their greed lost a lot of money. They were so certain the stock market would go down (because they read it everywhere) that they bought triple leveraged ETF’s that shorted the market. What that means is that these ETF’s give you triple the bang for your buck and you will make or lose three times more for your money than you normally would. Since these young investors were betting against Trump and the market, they lost three times as much as they would have had they just shorted the market.
This was surely greed in action: the desire to capitalize and make a quick buck on something they thought was almost a sure thing. Of course we now know the market never tanked and ended up doing the opposite of what these greedy investors had hoped, reaching new highs shortly after the election.
Short Time Frames Always Increases The Risk
Most investors, no matter what their philosophy is, have probably bought a stock or two as a short term play. I know I have. But buying something that is triple leveraged means that you are in effect borrowing money you don’t have. And if you do that as a quick, short term trade as these investors most likely did, you really can’t call it investing. They borrowed money to gamble that the stock market would go down after Trump’s win and it went up instead. They got greedy and lost.
I don’t know where they learned to do something like that but that is NOT the way to invest in stocks. Unfortunately actively trading stocks seems to be the cool thing to do these days as the media continually hypes this trade or that. It seems like stock trading has become a way to get an adrenaline rush and that is not a healthy sign.