Easy Money
Easy Money
“It’s a lock. It can’t lose. There’s no way that Notre Dame wins”
I was 18 years old when I uttered those words.
The year is 1993. The college football season is reaching its end and Florida State is scheduled to travel to Notre Dame late in the year for a pivotal game.
When they meet on November 13, 1993, it’s a battle between the top two teams in the country. Media outlets are calling it the “Game of the Century”.
At the time, I was a teenager with limited income who watched a lot of sports. The week of the game, I was certain that Florida State would win and wanted to augment my meagre means with an investment of sorts on the game.
Led by eventual Heisman Trophy winner (and future New York Knick point guard) Charlie Ward and a stout defense, the Seminoles were demolishing teams. They entered the game 9-0, winning those nine games by an average margin of 44-6.
Given my limited options for such an investment at the time, I approached my Dad and told him about my “can’t lose” wager. He agreed to take Notre Dame in the game.
Notre Dame led 31-17 with 1:39 left in the game until Ward connected with Kez McCorvey for a touchdown. The Seminole defense held the Fighting Irish and Ward had one more chance to complete the comeback.
He drove Florida State down to the Notre Dame 14 with three seconds left. However, Notre Dame knocked away a last-second pass in the end zone and held on to win 31-24.
The can’t lose proposition had lost.
After the game, my Dad sat me down and said that he was glad that I didn’t win. He hoped my first foray into investing of any sort, be it sports wagering or the stock market, was a loser. That way, he insisted, I would not be lured into a false sense that any kind of investing was easy.
“There’s no such thing as a lock. There’s no easy money.”
I was reminded of this life lesson recently when I went to visit my physiotherapist.
In the midst of my session, I casually asked him how things had been going during the pandemic. He responded that the best thing to come out of it was that he’d discovered investing in stocks. While mentioning that he wasn’t well versed in finance, he told me how “easy” investing in stocks was. No matter what he bought went up.
Using low (or no) cost trading apps like Wealthsimple Trade and Robinhood (in the United States), investors have been flipping hot stocks like Tesla, as well as perceived relics such as Hertz and Kodak, with stunning results. Young investors making sizable sums of money on these apps has been a big story during the pandemic.
As is the case with many bubbles (Bitcoin and weed stocks in 2017 immediately come to mind), interest takes off as people begin to make money. The early adopters tell others of their success and those late to the game jump on, eager to make the same big score.
The pandemic has added an extra layer onto this – people have been stuck in their homes and have been looking for some entertainment and instant gratification. People are bored and trading stocks (often for the first time) throughout the day was a way to alleviate some of that boredom.
When starting out any endeavour, early wins tend to lead to increased confidence. When these early “wins” lead to money in your pocket, it can often lead to overconfidence. With this in mind, here are a few common mistakes that investors should try and avoid.
Overextending their investments
Let’s talk about Dave and Mary.
In early May, Mary mentions to Dave about the success she had in purchasing shares of Tesla.
She purchased them at $365 in late March and they were now at $750.
This return on investments intrigued Dave, who admittedly knew little about stocks. Not wanting to be left out, Dave purchased three shares at $750.
As the calendar turned to the beginning of August, Dave was thrilled to see that his shares had skyrocketed to $1500.
Instead of appreciating the incredible return he achieved in a short amount of time, Dave is kicking himself for not investing more.
He had heard a lot of good things about Shopify. Thinking that stocks only go up, Dave dipped into his savings and bought 30 shares of Shopify at $1090 in early August.
Unfortunately, the month of August wasn’t kind to Shopify and its share price dropped to $929 by mid-September.
This was a big blow to Dave who was seeing a large portion of his savings dwindle on a daily basis. Not comfortable with this, Dave decided to get out in mid-September and sold his shares at a significant loss.
Getting involved with investments they don’t understand or don’t fit their financial plan
300% returns over 4 months got you down? Simply buying and selling individual stocks just not doing it for you anymore? Let me introduce you to options trading!
At their most basic level, options provide the investor with the right (but not the obligation) to buy or sell a stock at an agreed-upon date and price. If you think a stock will fall in price, you would buy a put option. On the other hand, you’d buy a call option if you thought the stock would rise.
You can use options in a variety of ways to aid your portfolio. For example, many investors use them to hedge some risk in your portfolio.
In 2020, it seems, the majority of investors using options are looking to bet on a stock going up or down in price without actually having to purchase the shares.
How does this work? This primer from Investopedia will illustrate:
For example, to purchase 200 shares of an $80 stock, an investor must pay out $16,000. However, if the investor were to purchase two $20 calls (with each contract representing 100 shares), the total outlay would be only $4,000 (2 contracts x 100 shares/contract x $20 market price). The investor would then have an additional $12,000 to use at his or her discretion.
If you pick the right stock at the right time, it can be a very powerful tool.
The potential problem here is that, at some point, it becomes less about investing and more about gambling and trying to hit the big score.
This Vox article from July discusses “regular” investors and their increased stock (and option) trading habits during the pandemic.
One quote in particular jumped out to me:
“It’s boring watching stocks, it’s not exciting, they’re not making these crazy prices,” said Adam Barker, a 31-year-old software engineer in Massachusetts. “You don’t get a rush throwing money at Berkshire Hathaway and waiting 15 years.”
This quote reminds me of why most people lose when they gamble, specifically when betting on sports.
What’s more exciting? Betting one game and turning $20 into $40? Or betting an 10-game parlay and turning $5 into $3600?
Most people will choose the latter option without realizing the astronomical odds required to hit a 10-game parlay. The allure of potentially turning nothing into something is why there will always be a demand for casinos and lotteries. They’re basically a tax on people who are bad at math.
If utilized properly, options can be no more risky than purchasing individual stocks. However, they are not risk free and investors should understand the pros and cons (especially the cons) of options trading before getting into options trading.
Believing that stocks only go up
If you started your investing journey in April 2020, you could be forgiven for thinking that stocks only go up. After all, that’s been the case for the vast majority of the last 6 months.
The problem is that stocks, in fact, do go down.
With all that has taken place in 2020, it’s easy to forget that the first three months of the year were not at all positive for the markets. By March 23, 2020, the S+P 500 had fallen 34% for the year.
That, of course, is hindsight.
Looking forward, there are a number of potential disruptive events for the market. The US election is only a month away. A COVID-19 “Second Wave” (with accompanying economic shutdowns) would be devastating for many businesses.
The point is that we don’t know what might cause the next market downturn, nor do we know when it will arrive. We can be certain, however, that it will arrive at some point.
Investing can seem easy when the markets (and your portfolio) are on a steady upward rise. The question is how investors deal with an inevitable correction?
So, how can you avoid some of these mistakes and keep your plan on the right track?
Here are a few points to keep in mind as you are making your next investment decision:
- Recognize that you are not always going to be right on your stock picks or investment decisions. Make sure that a “dud” does not significantly hamper your financial future.
- Don’t invest because of FOMO. Research potential investments fully and don’t be swayed by the allure of “easy money”.
- Recognize that your portfolio is not always going to go up. Be prepared for some volatility.
- Most importantly, always listen to your Dad.